Morgan Stanley strategists say stock-market leadership is shifting away from momentum-driven chip stocks toward software, financial services, insurance and healthcare as the economy enters a mid-cycle phase. The S&P 500 has climbed 14% this year and the Russell 2000 has gained 20%, while semiconductor shares have cooled since peaking in June.
A new economic cycle takes hold
Strategists at Morgan Stanley, led by Mike Wilson, tie the rally to a new economic cycle that began at the trough of a rolling recession around Liberation Day in April 2025. Sales growth has reaccelerated, they say, driving a V-shaped rebound in earnings-per-share growth as operating leverage returned to the median company.
The S&P 500 is up 14% this year, while the small-cap Russell 2000 has gained 20%. Semiconductor stocks have soared too — nearly every group but the "Magnificent Seven" is posting double-digit returns, the strategists note.
Momentum stocks cool, chip rally in question
Momentum stocks have lost steam, however, and semiconductor shares in particular peaked in June. The strategists say the group's recent moves resemble last year's silver rally and think chips may have one final push higher, but they no longer see the sector leading the broader market.
They frame the momentum selloff as more than simple repositioning. According to Morgan Stanley: "this transition to mid-cycle is what drove the repositioning", which was then amplified by leverage in overextended portfolios.
Rotation favors AI adopters over AI enablers
A midcycle rotation typically rewards free cash flow, operational efficiency and capital-expenditure discipline. The strategists say those conditions now favor software, financial services, insurance and healthcare services, where earnings revisions are already improving — in short, the market is moving from AI enablers to AI adopters.
Rising yields are the biggest risk
The strategists flag the recent break higher in long-end yields as their top concern, not because of fiscal-sustainability fears but because of strong nominal growth, oil and energy markets, and excess sovereign and corporate debt supply. The 10-year Treasury yield stood at 4.795%, up 3.90 basis points over five days.
Source: MarketWatch
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