According to recent reports from Morgan Stanley, memory semiconductor stocks such as Samsung Electronics, SK hynix, and Micron should be reduced in favor of increasing exposure to hyperscalers such as Amazon, Microsoft, and Meta. The firm’s rationale is slowing upward revisions to earnings estimates, along with the view that the profit outlook that fueled the semiconductor rally is no longer improving as quickly as before.
The Philadelphia Semiconductor Index has fallen more than 11% over the past two weeks, raising speculation that sector rotation may be under way. In contrast, JPMorgan offered the opposite view, calling the pullback in semiconductors a buying opportunity and saying it still prefers chips over hyperscalers because it sees supply shortages persisting through 2028.
The key issue will be second-quarter earnings. If hyperscalers maintain or expand capital expenditure, semiconductors may regain an opportunity. But if they cut investment, concerns about oversupply are likely to intensify.
AI’s rally was led by semiconductors, but Morgan Stanley now says that leadership may be shifting back to big tech. The firm recently advised clients to trim exposure to memory semiconductor names and add large technology stocks. The companies named on the reduction list were Samsung Electronics, SK hynix, and Micron, while Amazon, Microsoft, and Meta were recommended for larger allocations. Hyperscalers are companies that directly operate massive data centers.
The report was led by Chief Investment Officer Mike Wilson. He argued that semiconductor stocks, despite leading the market throughout the rally, are losing momentum. In a Bloomberg interview, Wilson said semiconductors could face downward pressure while hyperscalers may remain relatively resilient.
His case rests on an apparent disconnect. Amazon, Microsoft, and Meta are spending unprecedented amounts on AI, yet their share prices have fallen. By contrast, semiconductor stocks have surged. Wilson interpreted that divergence as a warning sign for semiconductors.
The main reason for the shift is earnings. Semiconductor strength had been supported by upward revisions to earnings estimates, but Morgan Stanley said the pace of those revisions is slowing. If expectations are no longer rising rapidly, stock prices may struggle to sustain the same momentum as before.
The slowdown is visible in pricing. DDR4 and other DRAM price gains are beginning to moderate year over year, and inventory improvements are showing signs of stalling. That suggests there is less room to further raise profit forecasts.
There are also concerns that expectations have already become too lofty. Earnings forecasts for semiconductor companies have climbed to historically high levels. Wilson compared this year’s semiconductor rally to the recent surge in silver prices, suggesting it has been driven more by liquidity than by fundamentals.
Signs of cooling are also appearing in the market. The Philadelphia Semiconductor Index, which tracks U.S. chip stocks, has dropped more than 11% over the past two weeks, with losses especially pronounced since last month’s peak. As most of the gains have been erased, some observers say sector rotation may already be starting.
Morgan Stanley pointed to hyperscalers as the alternative. It said those stocks have already passed through their weakest period. As AI competition intensifies, the firms that control data centers are expected to continue enjoying stable benefits. Easing rate-hike concerns and lower oil prices were also cited as factors shifting money toward consumer discretionary, transportation, and biotech stocks.
The latest view also aligns with trends since June. Despite massive investment spending, hyperscaler stocks were under selling pressure last month. Attention is shifting from investment growth to investment efficiency, or capital expenditure discipline. Morgan Stanley’s argument is that stocks that have lagged may now have the potential for a rebound.
Wall Street remains divided over the same decline. JPMorgan took the opposite stance, seeing the semiconductor pullback as a buying opportunity. It said AI chip demand remains firm and that meaningful new supply will not arrive until 2028, which is why it still prefers semiconductors over hyperscalers.
Ultimately, the issue is not direction but timing. Both banks acknowledge long-term AI growth. They differ only on where the next upside will come from. Morgan Stanley also remains constructive on memory semiconductors over the long term, assigning greater weight to the possibility of a short-term correction.
For Korean investors, this is far from irrelevant. Samsung Electronics and SK hynix were both included among the stocks recommended for reduction. Those two names are pillars of the KOSPI. Still, the recommendation reflects just one view, and a contrary opinion from JPMorgan clearly exists. The earnings and investment plans of the two companies are seen as key factors that will determine the direction of domestic semiconductor stocks.
The second-quarter earnings season is the real turning point. Hyperscaler capital expenditure forecasts for this year exceed $800 billion, and next year’s projections surpass $1 trillion. If those companies keep to or expand their investment plans, semiconductors could once again become a buying opportunity. If they scale back spending, however, worries about oversupply will gain momentum. According to Morgan Stanley, the crucial factor lies not with semiconductor companies themselves, but with the decisions of their customers.
Wilson was cautious on the direction of the index. He said major U.S. benchmarks could face pressure in the near term. Even so, he set a year-end S&P 500 target of 8,000, about 7% above current levels, suggesting he sees both short-term correction and long-term upside.
Historical precedent was also cited. In 2021, Morgan Stanley issued a report titled “Memory, Winter Is Coming,” warning of a slowdown in the industry. At the time, it downgraded its view on Samsung Electronics and SK hynix, and the market did in fact enter a downturn afterward. That earlier call, now regarded as accurate, is adding weight to the current recommendation to cut exposure. Market attention is now turning to the next round of earnings announcements.