Morgan Stanley's Wilson keeps S&P 500 target at 8,000 after chip rout

The semiconductor selloff that erased $1.8 trillion from the S&P 500 is a necessary correction in an otherwise intact bull market, according to Morgan Stanley's top strategist.

The S&P 500 lost $1.8 trillion in market value Friday as the Philadelphia Semiconductor Index plunged 10.3%, its steepest single-day drop since March 2020. The Nasdaq Composite fell 1,121.53 points, or 4.18%, to 25,709.43 — the largest single-day point decline in the index's history.

"A correction was inevitable and ultimately healthy if this bull market is going to extend into year-end," said Mike Wilson, chief equity strategist at Morgan Stanley, in a note published Monday.

The selloff was concentrated in semiconductor and memory stocks, where the Philadelphia Semiconductor Index had surged 96% year to date before Friday, trading 35% above its 50-day moving average — the widest gap in about 25 years. Its nine-day relative strength index stood at 83, showing how extended the rally had become. Marvell Technology led the decline, falling 16.7%, followed by Micron Technology at 13.3% and Advanced Micro Devices at 10.9%. Broadcom dropped 7.9% after guiding fiscal third-quarter AI chip revenue to about $16 billion, below buy-side expectations of $17 billion to $17.2 billion. Nvidia, the world's most valuable chipmaker at nearly $5 trillion, fell 6.2%, shedding approximately $330 billion in market value.

Wilson maintained his year-end S&P 500 target of 8,000, arguing that the fundamental backdrop remains supportive. The latest ISM manufacturing index accelerated to 54, the highest since 2022, while the three-month average payroll gain of 166,000 is the strongest since 2023. Earnings revision breadth for the S&P 500 has reached 26%, a new cycle high, suggesting profit growth is broadening beyond the AI trade.

The selloff was triggered by two converging catalysts. Broadcom's decision not to raise its full-year AI chip sales outlook disappointed investors who had expected an upgrade. Then Friday's employment report showed the U.S. economy added 172,000 jobs in May, significantly exceeding forecasts, pushing the 10-year Treasury yield above 4.5% and the 30-year yield above 5%. The combination punished duration-sensitive growth stocks and triggered the worst day for semiconductor shares since the pandemic-era crash.

Rotation, Not Liquidation

Despite the headline carnage, several strategists characterized the move as a violent sector rotation rather than a broad market breakdown. The Dow Jones Industrial Average had risen 1.7% to a record on Thursday, led by healthcare and financial stocks, and the Russell 2000 small-cap index surged 1.5% in the session before Friday's rout. UnitedHealth gained 5% and Goldman Sachs jumped nearly 5% on Thursday as investors rotated into cyclicals and value names.

Wilson recommended shifting capital from the still-crowded momentum trade toward consumer discretionary, regional banks, and transportation stocks. Within technology, he noted that semiconductor and memory-related hardware stocks have had the best earnings revisions by far, but that advantage is already well understood by markets.

Risks to Watch

Wilson flagged two risks that could derail the bull case. If the 10-year Treasury yield moves well above 4.5%, equity valuation multiples could compress. He also warned that liquidity driven by the Federal Reserve and Treasury has been tightening after rapid expansion in the first quarter, a dynamic already reflected in the poor performance of precious metals and cryptocurrencies over the past several months.

Futures trading Monday morning suggested a partial recovery, with Nasdaq 100 futures rising 0.8% and S&P 500 futures gaining 0.4%, though South Korea's tech-heavy Kospi index fell 8.1% as the selloff rippled across Asia. Oil prices surged after Israel traded fire with Iran, adding another layer of uncertainty for equity markets.

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