Semiconductor rally losing steam, Morgan Stanley says, as investors eye hyperscalers

Even as chipmakers such as Micron set earnings records quarter after quarter, Morgan Stanley says the upward momentum in semiconductor stocks is fading, with investors shifting their attention to hyperscalers — operators of large-scale data centers — and other sectors.

A Morgan Stanley team led by Michael Wilson, the firm's chief US equity strategist, published a report Monday, according to Bloomberg. The bank said hyperscalers such as Amazon, Microsoft and Meta Platforms are building solid core businesses within the AI ecosystem, making them an attractive option. It added that semiconductor stocks — this year's best-performing group — are likely to struggle to reach new record highs as sector rotation takes hold.

Other indicators support the view that the semiconductor market has peaked. The Philadelphia Semiconductor Index, which tracks share prices of 30 major chipmakers listed on US exchanges, has fallen about 14 percent from its peak last month. According to Reuters, the index rose 11 percent over the course of last month before dropping more than 11 percent in the past two weeks. Although it remains 123 percent above its September 2025 level, it has been on a sustained downtrend so far this month. By contrast, UBS's hyperscaler basket has fallen only 2 percent since September 2025.

Morgan Stanley said receding expectations for Federal Reserve interest rate increases and a declining trend in global oil prices are fueling rotation away from semiconductor investments. The bank also reiterated that while companies such as Alphabet and Amazon have poured tens of billions of dollars into AI infrastructure, the revenue needed to justify that spending has yet to be clearly demonstrated. It added, however, that "capital expenditure discipline could tighten" in the near term.

In an interview with Bloomberg TV, Wilson said hyperscalers "will now stabilize" while "semiconductor stocks will see a correction." He also said the divergence between the two groups was "not sustainable."

In US markets, semiconductor stocks have failed to sustain a rebound even after Micron posted blowout earnings on June 24, reporting sales of $41.46 billion. Investors are expected to gauge AI chip demand at Nvidia's earnings release next month, among other events.

Wilson named consumer discretionary, transportation and biotech as sectors likely to benefit from rotation out of semiconductor stocks. He set a year-end target of 8,000 for the S&P 500, implying about 6.1 percent upside from Monday's close of 7,537.43.