Morgan Stanley strategists stated that even though the broad European index remains near historic highs, if the "rotation bear market" in European equities reverses, semiconductors, technology hardware, and capital goods sectors would benefit the most.
A team led by Marina Zavolock wrote that the semiconductor sector stands far ahead in terms of its sensitivity to a reversal in this market rotation, followed by technology hardware, capital goods, metals and mining, and consumer discretionary retail; defense, real estate, and construction sectors rank at the bottom in terms of sensitivity.
Strategists believe the recent market pullback has already been excessive.
Cyclical stocks such as European banks have declined about 13% relative to defensive sectors, and the spread between strong and weak momentum names has fallen about 14% from its June high.
The report noted that European AI infrastructure names have underperformed the MSCI Europe index by as much as 29% since the June peak, and the ratio of AI infrastructure stocks to AI-pressured stocks has dropped by as much as 42%.
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