Wall Street financial giant Jefferies has advised investors to hold high-quality stocks with low profit-taking pressure and low crowding in the near term, in order to safely navigate a potential summer pullback in technology stocks. This view aligns with top strategists such as Morgan Stanley strategist Michael Wilson, who have suggested that amid the unwinding of crowded AI semiconductor trades and deleveraging, investors should periodically reduce positions in highly crowded, highly leveraged, and high-beta AI computing trades, and rotate toward high-quality, low-momentum, cash-rich cyclical and defensive stocks that have seen far less gains than technology stocks this year.
As of the close of Asian stock markets on Tuesday, the AI semiconductor trading theme, which had reached record bullish crowding and carried substantial leveraged positions, moved into a pullback. Samsung Electronics shares closed down 6.9%, SK Hynix fell 6%, and South Korea’s benchmark KOSPI composite index closed down 4.9%, with the decline subsequently transmitted to U.S. markets. The Philadelphia Semiconductor Index closed down 4.9% on Tuesday, with high-beta AI semiconductor industry leaders such as Intel, AMD, Micron, and Marvell Technology bearing the brunt of the pressure, reflecting that after bullish expectations had reached extreme optimism, any trading sentiment or supply-demand disturbance could trigger an unwinding of crowded trades and deleveraging.
Desh Peramunetilleke, head of quantitative strategy at Jefferies, noted in a report that issues related to artificial intelligence include potential overcapacity, the profit path remaining unclear after hyperscale cloud computing vendors are expected to invest $700 billion in capital expenditures, and demand pressures arising from rising overall Token costs. Since 2024, the S&P 500 Momentum Index has outperformed the broader U.S. stock market by more than 70%, approaching extreme levels seen during the dot-com bubble. The strategist team stated that although they still believe this theme is a long-term winning investment, the above reasons could drive a wave of liquidation in AI-driven momentum trades.
Jefferies screened for companies with high quality scores, market capitalizations above $10 billion, and long-term free cash flow yields above 3%, while also requiring limited momentum, attractive valuations, and forward price-to-earnings ratios below 20 times. The top recommended list includes: AbbVie (ABBV), American Express (AXP), Home Depot (HD), Lowe’s Companies (LOW), McDonald’s (MCD), Netflix (NFLX), PepsiCo (PEP), Procter & Gamble (PG), S&P Global (SPGI), and Stryker (SYK).
Among them, AbbVie received the highest quality score, and Jefferies expects it to achieve nearly 28% compound annual earnings growth from 2026 to 2027, with a free cash flow yield of 5.2%. AbbVie is scheduled to report second-quarter results on July 31, having risen 25% over the past three months and 37% over the past year, with a dividend yield of 2.7%. Netflix currently has a total market capitalization of approximately $320 billion, a free cash flow yield of 3.6%, and is set to report second-quarter results on July 16; it has declined 18% year-to-date in 2026 and has fallen nearly 41% cumulatively over the past 12 months.
As the AI semiconductor theme pulls back due to excessive crowding, capital has begun shifting from highly crowded AI computing to cash flow defensive assets, and Wall Street’s strategic focus is spreading from AI computing infrastructure to a broader range of high-quality fundamental assets. This strategy aligns with the view of Morgan Stanley chief equity strategist Michael Wilson, who advocates for periodically exiting highly crowded, highly leveraged AI computing trades and embracing broader market breadth, particularly in defensive themes such as financials and healthcare, as well as undervalued cyclical sectors including consumer discretionary, industrials, transportation, and regional banks.
Wilson’s team emphasized that the breadth of U.S. equity market participation should continue to improve, and the recent weakness in AI semiconductors may signal a shift in trading focus from chip manufacturers to hyperscale cloud vendors, while sectors such as consumer discretionary, transportation, and biotechnology could benefit from capital reallocation. The core of their strategy is not that the AI bull market has ended, but rather that valuations and positioning among AI capex beneficiaries have become overheated, and the market needs to broaden out toward cyclical and defensive sectors with earnings recovery, stable cash flows, and more reasonable valuations.
According to a Markets Live Pulse survey, among 221 respondents surveyed between June 22 and July 2, 53% indicated a preference for increasing holdings in traditional cyclical economic stocks in the second half of the year and taking some profits from technology stock gains. Yung-Yu Ma, chief investment strategist at PNC Asset Management, said that PNC has shifted its investment stance on AI-related technology stocks from overweight to neutral, citing that AI computing trades are already fairly fully priced at current levels, and that investors should now broaden their horizons to focus on other relatively lagging areas in the market. Mislav Matejka, global equity strategist at JPMorgan, also favors rotation into cyclical stocks, arguing that as long as geopolitical tensions ease and earnings and inflation remain stable, the broadening and rotation into cyclical sectors will remain a winning strategy through the end of the year.
In Wilson’s view at Morgan Stanley, the broadening of the AI bull market does not mean the end of the AI theme, but rather that a pullback in popular tech stocks could serve as a trigger for capital to rotate from extremely crowded tech leaders into classic cyclical, consumer, healthcare, industrial, financial, and transportation sectors that are poised for earnings recovery, with the market entering a bull market driven by multiple engines.
