Morgan Stanley Strategists say U.S. stocks may struggle to reach new highs as investors withdraw funds from some of the best-performing tech stocks this year.

A team led by strategist Michael Wilson said that momentum in semiconductor stocks is waning, with investors turning to underperforming stocks such as AI hyperscale cloud service providers.

He pointed out that this type of stock includes Microsoft. Amazon Companies like Meta Platforms Inc. are attractive in the AI ecosystem due to their strong core businesses.

However, he noted that major U.S. stock indices will remain under pressure in the short term, given that some large companies in the indices are experiencing a reversal of their upward momentum. Wilson added that this rotation continues amid “overall volatility/weak stock market.”

The Philadelphia Semiconductor Index has fallen nearly 14% from its record high due to investor concerns about overvaluation. However, the index is still up 123% since September, while UBS... The group's hyperscale cloud service provider index fell 2% over the same period. The S&P 500 has been declining since its peak in June.

Wilson stated that he is more optimistic about hyperscale cloud service providers in the short term than semiconductor-related stocks. He also anticipates that, given their recent poor performance, hyperscale cloud service providers may begin to lower their spending expectations.

He gave a year-end target of 8,000 points for the S&P 500, which means an increase of about 7% from the current level.

He also predicts that funds rotating out of chip stocks will flow into consumer discretionary, transportation, and biotechnology sectors. (JPMorgan Chase ) Strategist Mislav Matejka shares the same view, believing that the market rally in the second half of the year will extend beyond the technology sector.

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