Morgan Stanley flags rotation from chips to hyperscalers, sets S&P 8,000 target

The S&P 500 will struggle to reach new highs as investors rotate out of semiconductor stocks into AI hyperscalers, according to Morgan Stanley strategists led by Michael Wilson.

"The momentum unwind is happening in some of the larger companies in the index, which will keep major benchmarks under pressure in the short term," Wilson, the firm's chief investment officer and chief US equity strategist, said in a note to clients Monday.

The Philadelphia Semiconductor Index has slumped nearly 14 percent from a record last month, though it remains 123 percent higher since September and up 78 percent year to date. The Roundhill Magnificent Seven ETF, which includes several hyperscalers, has posted a 1.3 percent loss this year. Wilson set a year-end target of 8,000 for the S&P 500, implying about 7 percent upside from current levels.

The call comes as hyperscaler capital expenditure projections have been revised sharply higher, with estimates reaching $805 billion for 2026 and $1.116 trillion for 2027. Yet the stocks themselves have underperformed, creating what Wilson sees as a disconnect that signals the chip rally may be nearing a cyclical peak.

Wilson favors hyperscalers including Microsoft Corp., Amazon.com Inc. and Meta Platforms Inc. over semiconductor-related stocks in the near term, citing their strong core businesses and the ability to participate in the agentic application layer. He also expects these companies may begin to temper expectations around spending plans given their recent underperformance.

The rotation is part of a broader oscillating pattern between AI beneficiaries over the past two years, Wilson said. While the long-term trajectory of artificial intelligence investment remains intact — evidenced by those trillion-dollar capex projections — the specific stocks that benefited most from the initial infrastructure buildout may need to pass the baton.

Consumer discretionary and biotech emerge as beneficiaries

Beyond hyperscalers, Wilson identified consumer discretionary, transport and biotech as sectors likely to benefit from the rotation out of chipmakers. The strategist pointed to falling oil prices as a factor shifting wallet share from services to goods, which favors consumer discretionary companies.

Biotech stands out as one of the most rate-sensitive market areas, historically delivering nearly 20 percent annualized returns in elevated and falling rate regimes, according to Wilson. "Given our view that policy rate expectations remain overly hawkish this year in the context of our house call for core CPI to stay contained below 3 percent, we think biotech offers an attractive risk/reward opportunity," he said.

JPMorgan Chase & Co. strategist Mislav Matejka shares Wilson's view that the market rally will broaden beyond technology in the second half of the year, adding weight to the rotation thesis.

The S&P 500 has drifted lower since hitting a peak in early June, while the Nasdaq Composite fell 4.6 percent in a single week in late June. The SOX index dropped 7.9 percent over the same period, a move that highlights the magnitude of the semiconductor pullback.

The 10-year Treasury yield has remained elevated near 4.3 percent as the market prices in a slower pace of rate cuts, while the US dollar index has held above 105. West Texas Intermediate crude has fallen below $75 a barrel, supporting Wilson's view on consumer discretionary spending.

This article is for informational purposes only and does not constitute investment advice.