Unfazed by sell-offs? Morgan Stanley's Chief: AI will continue to boost tech stocks, focus on application side!

Morgan Stanley’s Chief US Equity Strategist Michael Wilson released a new report stating that supported by the AI boom, the technology sector’s revenue outlook remains strong, and there is further room for US tech stocks to rise.

The team led by Wilson pointed out that the revenue growth expectations for large tech stocks have reached “the highest level in decades,” and their valuations have declined after recent market volatility. At the same time, the collective plunge in software stocks has created “very attractive buying opportunities” for stocks like Microsoft and Intuit.

The report states: “Periods like last week are not uncommon in major investment cycles. Nevertheless, the fundamental positive factors for the AI-enabled sector remain, and we also believe that the investment value of AI application-related stocks is still undervalued.”

For those questioning the huge returns on AI investments, Wilson’s view may offer some reassurance. Last week, the Nasdaq 100 experienced its largest weekly decline since December last year, and stocks believed to be impacted by AI also fell after new tools were released.

Currently, the Bloomberg “Seven Giants” Index P/E ratio is about 29 times, slightly below the five-year average. Although some investors entered the market last Friday to buy on dips, whether this momentum can be sustained remains uncertain.

Wilson’s team’s analysis also shows that investors have yet to impose more structured and strict controls on corporate capital expenditures. The strategist noted that stocks with a higher ratio of capital expenditure to revenue continue to outperform the broader market.

He also believes that companies applying AI to core business operations, rather than those developing technology and infrastructure, have more opportunities. Wilson stated that these application-side companies’ stock prices tend to outperform the market by an average of 1% on the first trading day after earnings reports.

Finally, the report also mentioned that the decline of the US dollar has provided a boost to tech stocks, as about half of the revenue of Nasdaq 100 component stocks comes from overseas markets. Meanwhile, Wilson and his team believe that earnings revisions for semiconductors, software, tech hardware sectors, and the “Big Seven” tech giants (the seven largest Nasdaq stocks) will see a broader rebound.

Coincidentally, despite experiencing an extremely tough week last week, Rick Sherlund, founder of Sherlund Partners, an AI software investment bank and one of Wall Street’s most well-known tech bankers and research analysts, also sent an “optimistic signal,” stating that although tech stocks have recently pulled back, the market remains on the verge of a significant rally.

“While investors are focused on the continuous growth of capital expenditure by large tech companies, I believe that the potential demand for AI infrastructure makes these investments necessary rather than excessive,” he said.

Sherlund also dismissed concerns about massive investments by large tech companies in AI, pointing out that the real issue is not whether demand will materialize. He said, “Demand exists. The question is whether capacity can keep up.”