Morgan Stanley cautions AI chip rally may be losing momentum

Morgan Stanley strategist Lisa Shalett has issued a warning that the artificial intelligence chip rally may be approaching a turning point. According to the analysis, semiconductor stocks currently face valuation pressures as hyperscalers—major cloud and technology companies—increasingly develop their own lower-cost proprietary AI chips rather than relying solely on third-party solutions. This shift in procurement patterns could reshape competitive dynamics within the semiconductor industry.

Shalett's outlook indicates expectations for slowing AI infrastructure spending and reduced pricing power among chipmakers in the period ahead. The warning comes even as investor enthusiasm for semiconductor equities remains elevated and SK Hynix prepares for its Nasdaq debut, signaling continued market appetite for chip sector exposure.

The semiconductor and chip design sectors have experienced significant investor interest over the past two years, driven by generative AI adoption and datacenter expansion. However, concerns about valuation sustainability and competitive pressures from in-house chip development programs are now entering investor conversations. As major technology firms become chip developers themselves, traditional chipmakers may face margin compression and slower revenue growth from their largest customers. This structural shift highlights potential headwinds for the sector despite ongoing AI infrastructure investments globally. Market participants are increasingly scrutinizing whether current chip stock valuations adequately reflect these emerging competitive dynamics and the possibility of moderating demand growth.

Source: Markets-Economic Times