Indian IT firms face muted Q1 as AI shift, weak demand weigh

Morgan Stanley said the recent weakness in U.S. semiconductor stocks is a sign that the market gains are broadening, with investors likely to turn ​toward AI “hyperscalers” as well as consumer discretionary, transport ‌and biotechnology shares.

In a note dated Monday, the brokerage said hyperscalers — an industry term for tech companies that are spending big on data ​centers — could benefit from a rotation away from semiconductor stocks ​as the AI cycle shifts.

Although the likes of Alphabet ⁠and Amazon have committed billions to scale up their AI infrastructure, skyrocketing ​the share prices of semiconductor companies, clear evidence that AI ​products can generate returns that justify the spending is yet to be seen.

But Morgan Stanley said there could be “more capex discipline in the near-term” ​and that the hyperscaler stocks have already gone through ​their period of underperformance.

Alphabet, Amazon, Meta Platforms and others saw heavy ‌selling ⁠in June, while the Philadelphia SE Semiconductor index climbed 11% last month.

But the chip index has fallen over 11% in the last two weeks, while the Roundhill Magnificent ​Seven ETF — ​a proxy to ⁠track the seven biggest Wall Street tech companies — has recovered some lost ground.

Morgan Stanley ​also said that the markets paring back expectations of ​rate ⁠hikes by the U.S. Federal Reserve, along with a fall in crude oil prices, is also driving the rotation out ⁠of the ​red-hot chips trade.

Consumer discretionary goods, ​transports and biotechnology-related stocks could benefit from the rotation, according to the ​brokerage. Reuters