Morgan Stanley warns: US stocks may struggle to hit new highs, investors are rotating out of tech stocks.

BlockBeats news, July 6, Morgan Stanley strategists believe that as investors pull out of the year’s strongest-performing technology stocks and rotate into other sectors, the U.S. stock market may face resistance in setting new all-time highs. This rotation could weaken the prior market leadership pattern that had been dominated by AI and mega-cap tech stocks.

The bank’s analysis notes that most of the current positive news regarding the economy and earnings has already been priced in by the market. Index performance has been tending to stagnate, and the market needs truly above-expectation positives to keep rising further. The market would like to see solid evidence that massive AI capital expenditures can be converted into sustained returns, rather than just continuously expanding spending figures. This uncertainty is prompting more funds to move from mega-cap tech stocks into a wider range of stocks.

Morgan Stanley recommends that investors place greater importance on the achievability and quality of earnings, realize some gains in small-cap stocks, and increase allocation to beneficiaries of AI applications in certain sectors. The bank’s prior research also showed that although large-cap tech stocks delivered strong performance in the third quarter, their share-price gains have clearly lagged, and valuations have declined accordingly. This is in sharp contrast to industrial and cyclical sectors, which have continued to rise due to expectations of interest-rate cuts—an additional indication that the market’s capital allocation structure is changing.