Morgan Stanley strategists recently suggested that despite market fluctuations, the robust sales outlook supported by the AI boom indicates that U.S. tech stocks may still have room for further gains. The team led by Michael Wilson at the bank noted that revenue growth expectations for large tech companies have climbed to “multi-decade highs,” while their valuations have actually declined following recent adjustments.
The report specifically highlighted that the significant decline in software stocks has provided “highly attractive entry points” for companies such as Microsoft (MSFT) and Intuit (INTU). Wilson analyzed in the report that market volatilities like those seen last week are not uncommon during major investment cycles. He emphasized that the fundamental positives for AI-enabling companies remain solid, and the market currently undervalues the trading potential of AI adopters.
This perspective offers some reassurance to investors who have begun to question the returns on massive investments in the AI sector. Previously, the Nasdaq 100 index experienced a significant phase of adjustment, while the stock prices of some companies perceived as potentially impacted by AI also declined.
While large-cap tech stocks in the U.S., represented by the “Magnificent Seven,” have generally outperformed the broader market, they have also faced greater pressure during market corrections. Currently, the forward price-to-earnings ratios of related indices are slightly below their five-year averages. Although bargain-hunting funds have attempted to enter the market, short-term momentum suggests that a rebound may face challenges.
Further analysis by Wilson’s team reveals that investors have yet to impose structural discipline on capital expenditures. Data shows that stocks with higher capital expenditure-to-sales ratios have consistently outperformed the broader market. Additionally, the report distinguishes between two types of company opportunities: compared to companies that merely create AI technology and infrastructure, those that deeply integrate AI into their core operations may possess greater potential. Historical performance indicates that the latter group, on average, outperformed the broader market by approximately 1% on the day following earnings announcements.
The team also noted the positive impact of a weakening U.S. dollar. Considering that about 50% of the revenue from Nasdaq 100 constituent companies comes from international markets, a softer dollar is favorable for their performance. Simultaneously, strategists observed an upward trend in earnings expectations for semiconductors, software, tech hardware, and the “Magnificent Seven,” signaling the formation of a broader corporate earnings recovery trend.
Overall, Morgan Stanley’s perspective suggests that driven by the long-term AI trend, recent market volatilities have instead made valuations in some tech sectors more reasonable, providing a window for investors to select companies with practical application capabilities and sound financial structures.
