The recent sharp correction in chip stocks has exposed a significant divergence in outlook between two Wall Street titans. JPMorgan believes a buying opportunity is approaching, while Morgan Stanley maintains that hyperscale cloud computing companies remain more attractive and expresses skepticism about chip stocks reclaiming market leadership.
The Philadelphia Semiconductor Index (SOX) tumbled 10% last week, marking its worst weekly performance since April 2025. The decline pushed the index more than 20% below its record closing high from a month ago, officially entering a technical bear market.
Against this backdrop, strategists at JPMorgan suggest that chip stocks are poised to "soon begin attracting buying support" and advise investors to consider repositioning this summer. In contrast, the strategy team at Morgan Stanley anticipates that even a potential rebound in chip stocks will likely not see them regain market leadership in the second half of the year, expressing a preference for holding hyperscale cloud companies.
JPMorgan's View: Chip Stocks Nearing Oversold, Summer Positioning Opportunity
The team led by JPMorgan strategist Mislav Matejka argues that the recent chip stock pullback reflects a rotation of capital and a fading momentum trade, rather than a deterioration in industry fundamentals.
The team notes that the Relative Strength Index (RSI), a momentum gauge, is rapidly approaching oversold territory, and the momentum factors that previously drove chip gains have cooled significantly. Concurrently, chip company earnings remain robust, providing support for current valuations.
From a supply-demand perspective, JPMorgan believes that effective new semiconductor production capacity will remain relatively limited until 2028, suggesting near-term supply pressures are not prominent.
The team stated that if hyperscalers maintain strong capital expenditure guidance, chip stocks could present a reconfiguration opportunity this summer. However, JPMorgan also cautions that the unwinding of momentum factors and capital rotation typically amplifies market volatility, warning investors to brace for potential short-term turbulence.
Simultaneously, JPMorgan remains cautious about how cloud giants will translate massive AI capital investments into actual profits and maintains a bearish stance on sectors like software, commercial services, and media, which may face AI-driven substitution risks.
Morgan Stanley's Perspective: Chips May Rebound, But Leadership Unlikely to Return
In comparison, the team led by Morgan Stanley strategist Mike Wilson adopts a more cautious view on chip stock prospects. They believe that following a correction exceeding 20%, a technical rebound in chip stocks would not be surprising, but this does not imply the sector can regain market dominance.
"The market advance is broadening out to more sectors," Wilson's team stated. They expect that following this adjustment period, areas such as consumer discretionary and transportation could become new drivers propelling the market higher.
Within the AI investment theme, Morgan Stanley shows a preference for hyperscale cloud companies. The team argues these firms possess stronger core business support, are positioned to benefit from the development of Agentic AI, and have room to enhance profitability through cost optimization.
However, Morgan Stanley also points out that over the past three weeks, cloud giants have outperformed chip stocks by approximately 30 percentage points, suggesting the near-term risk-reward profile has become less favorable.
S&P 500 Year-End Target Holds at 8000, But 7000 Support Level Warrants Caution
Regarding the broader market direction, Morgan Stanley maintains its year-end target of 8000 for the S&P 500, believing this level remains achievable.
The team indicated that the S&P 500's consolidation over the past two months aligns with prior expectations, with market structure transitioning from being driven by a handful of tech giants to broader sector participation.
Nevertheless, Morgan Stanley warns that if momentum trade unwinding spreads further or the Middle East situation escalates, the S&P 500 could face additional downward pressure, potentially seeking support around the 7000 level. This point is viewed as a critical technical support zone before a bull market trend can restart.
As of the latest update, U.S. stock index futures were broadly higher, with S&P 500, Dow Jones, and Nasdaq futures all in positive territory. However, geopolitical risks persist, and the market continues to closely monitor the impact of Middle East developments on risk assets.
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