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MORGAN STANLEY FLAGS FADING MOMENTUM IN CHIP RALLY

The semiconductor rally that has helped power Wall Street's advance is beginning to lose momentum, Morgan Stanley analysts said, flagging signs that the trade may be running out of steam.

Earnings optimism for chipmakers appears stretched, with the breadth of upward earnings-per-share revisions already near historical highs. Morgan Stanley analysts say this leaves limited room for further upgrades, a key driver that has supported the sector's outperformance in recent months.

U.S. equities have chopped around in recent weeks, buoyed by resilient economic data and sustained enthusiasm around AI, yet analysts at Morgan Stanley caution that the market's "just right" narrative could face growing tests in the second half.

At the same time, pressure is beginning to build on hyperscaler stocks, which have been central to driving artificial intelligence-led demand for chips. Morgan Stanley analysts warn that any sustained weakness in these companies could ripple across the semiconductor ecosystem, given their outsized role in data center and AI-related spending.

This combination of elevated expectations and emerging demand risks points to a potential shift in market leadership. According to Morgan Stanley analysts, a cooling in semiconductor momentum would likely accelerate the ongoing rotation into lagging sectors, fuelling a broader-based rally.

Such a transition could mark a healthier phase for equities. The recent run-up has been heavily concentrated in a narrow group of AI-linked names, leaving the wider market playing catch-up. A moderation in chip-sector leadership may encourage investors to diversify toward cyclicals and other under-owned segments.

(Rashika Singh)

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