Morgan Stanley warns: rotation of US tech stocks accelerates, AI funds are exiting mega-cap stocks.

Morgan Stanley strategists warned on Monday that as funds flow out of tech stocks and rotate into other sectors, the US stock market may face resistance in reaching new highs. The leadership pattern of mega-cap AI stocks is being weakened by capital rotation.
(Previous: Goldman Sachs: The pullback of the Magnificent Seven is a "pressure release," not a peak, with eight major sectors rotating beneath)
(Background: AI capital expenditure to reach 3.2% of GDP by 2027, surpassing US defense budget for the first time)

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• Good News Already Priced In, Needs Surprise Catalysts
• The "Trust Gap" from AI Spending to Profit Conversion
• Morgan Stanley's Investment Recommendations
• Implications for Taiwan Investors

Morgan Stanley strategists pointed out on Monday that as funds flow out of this year's best-performing tech stocks and into other sectors, the US stock market may face resistance in reaching new all-time highs. This rotation trend is weakening the leadership pattern previously dominated by AI and mega-cap tech stocks.

Good News Already Priced In, Needs Surprise Catalysts

Morgan Stanley's analysis indicates that much of the current positive economic and earnings news has already been priced in by the market, leading to stagnant index performance. To sustain upward momentum, truly unexpected positive catalysts are needed to drive further gains.

The market is no longer satisfied with the sheer scale of AI capital expenditure figures but demands concrete evidence that these investments can translate into sustainable returns. This uncertainty is prompting more capital to shift from mega-cap tech stocks to a broader range of stocks.

The "Trust Gap" from AI Spending to Profit Conversion

Morgan Stanley's core observation is that the market's narrative logic for AI is shifting from "spending scale" to "return efficiency." Specifically, there are three key changes:

• Funds exiting tech leaders — Investors are taking profits from mega-cap tech stocks (e.g., the Nasdaq's Magnificent Seven)
• Rotation to broader stocks — Capital flows into small-cap stocks and industrial/cyclical sectors
• Rate cut expectations as support — Industrial and cyclical sectors continue to rise on rate cut expectations, forming a sharp contrast with tech stocks

Morgan Stanley's Investment Recommendations

The bank offers three specific operational suggestions:

• Focus on earnings quality — Pay attention to the achievability and quality of profits, not just revenue growth
• Take profits in small caps — Moderately realize some gains in small-cap stocks
• Expand exposure to AI application beneficiaries — Increase exposure to AI application beneficiaries in certain sectors

Previous research by Morgan Stanley also showed that despite strong Q3 earnings performance, the stock price gains of large-cap tech stocks have significantly lagged, with valuations declining accordingly. This stands in sharp contrast to the continued rise of industrial and cyclical sectors on rate cut expectations, seen as another sign of structural changes in market capital flows.

Implications for Taiwan Investors

This rotation trend is not unfamiliar to Taiwan investors. Capital flow trends in the Taiwan stock market often lead the US market by 1-2 weeks—when US funds start to exit tech stocks, inventory pressure on Taiwan's semiconductor supply chain typically manifests 1-2 weeks later. Morgan Stanley's warning effectively reminds the market that it is transitioning from the "AI spending expansion" phase to the "return verification" phase, consistent with the rotation trajectory observed in Taiwan's stock market: "AI hardware → AI software → AI applications."

Notably, within the same timeframe, SK Hynix is also attracting more AI investment capital by listing on the US stock market, reflecting intensified capital competition in the AI sector and the dilution of the tech sector's "siphoning effect."