Morgan Stanley Quant Team: AI Chip Stock Decline Not Over, Recommends Trimming Positions on Rallies

Morgan Stanley's quantitative strategy team warns that the recent selloff in semiconductor and data center-related stocks is not over, with further downside risk still facing them over the medium term, and advises investors to use any rebound opportunities to trim such positions.

According to Wind Chaser Trading Desk, on October 27, Morgan Stanley's Ukyo Haraguchi quantitative strategy team noted in a report that in the third to fourth week of October, rising market concerns over financing and credit risks in AI infrastructure investment triggered a sharp selloff in semiconductor and data center-related stocks.

Although these sectors may see a technical rebound in the short term, the team believes the room for a medium-term correction has not yet been fully released and recommends "stepping up position reduction."

Selloff Exceeds Expectations, Medium-Term Risks Remain

Morgan Stanley's quantitative team had already cautioned in its October 9 report "Navigating the Higher Challenges of the Late-Stage AI Rally" that, against a backdrop of rising interest rates and elevated valuations, it would be unwise to take the sustainability of the AI rally lightly, and recommended a tactical overweight in low-volatility stocks while retaining exposure to financially sound value stocks to cope with a possible reversal in a highly concentrated AI-driven market.

The team said the speed and magnitude of the recent correction exceeded its expectations, but the direction of market rotation—with low-volatility and value factors outperforming—was consistent with its prior judgment, and this trend has been evident in both the Japanese and U.S. markets.

(Median forward 12-month P/E for AI and semiconductor-related stocks: despite the pullback, valuations remain high by historical standards)

The report also compared the current trajectory of the Philadelphia Semiconductor Index with that of the 2000 internet bubble period, noting that the two show similar price patterns.

(Semiconductor index price trends in the internet bubble period and the current period are similar)

Morgan Stanley Research has three global AI-related baskets: AI Enablers, AI Infrastructure, and AI Adopters.

The report shows that the first two have greater exposure to semiconductors and data centers and fell significantly in the recent correction; while the AI Adopters basket—companies that integrate AI into their own services and operations—had previously moved largely in sync with the first two but showed clear relative resilience during this selloff.

The report also cited the view of Morgan Stanley thematic research analyst Stephen Byrd, recommending a "barbell strategy"—with one end allocated to companies solving infrastructure bottlenecks (such as power supply) and selected semiconductor and infrastructure names, and the other end allocated to early-stage software enablers and AI application companies.

It is worth noting that the enabler category also covers infrastructure and security software providers, and is not limited to semiconductor and data center companies.

Screening Japanese AI Application Stocks: 50 Highly Correlated Names

To help investors identify AI application opportunities in the Japanese market, the team conducted a systematic screen of constituents of the TOPIX 1000.

Looking at historical performance, this 50-stock portfolio was generally weak in the first half of 2026, partly held back by market concerns over a "SaaS apocalypse," but its performance has improved since the second half of the year.

The 50 screened stocks are mainly concentrated in IT services and other sectors, covering large-cap companies such as Recruit Holdings, Nintendo, NEC, Nomura Research Institute, and BAYCURRENT, as well as small and mid-cap technology companies such as PKSHA TECHNOLOGY, Appier, and SANSAN.

Strategy Summary: Reduce Upstream, Increase Downstream, Hold Low Volatility

Overall, the current allocation recommendations of Morgan Stanley's quantitative team can be summarized in three main lines:

Second, continue to increase allocation to low-volatility stocks and financially sound value stocks to cope with market volatility;

~~~~~~~~~~~~~~~~~~~~~~~~

The above highlights are from Wind Chaser Trading Desk.

For more detailed interpretation, including real-time commentary and frontline research, please join [Wind Chaser Trading Desk ▪ Annual Membership] Risk Disclosure and Disclaimer

Markets carry risks, and investment requires caution. This article does not constitute personal investment advice and does not take into account the specific investment objectives, financial situation, or needs of individual users. Users should consider whether any opinions, views, or conclusions in this article are suitable for their particular circumstances. Investment based on this is at the user's own risk.