(Bloomberg) - US technology stocks have the scope to rally further as the buzz around artificial intelligence underpins a robust sales outlook, according to Morgan Stanley strategists.
The team led by Michael Wilson said revenue growth expectations for the biggest tech stocks have reached “multi-decade highs,” while valuations have declined after recent market volatility. At the same time, the rout in software stocks has opened up “attractive entry points” in some names like Microsoft Corp. and Intuit Inc.
“Periods like last week are not uncommon in major investment cycles,” Wilson wrote in a note. “That said, fundamental tailwinds remain in place for the AI enabler complex, and the AI adopter trade remains underappreciated in our view.”
His views are likely to be comforting for investors who have started questioning the payoff from hefty investments into AI. The Nasdaq 100 suffered its biggest weekly decline since December, while stocks deemed at risk of disruption from AI also sank following the release of a new tool.
The Bloomberg Magnificent Seven index now trades at about 29 times forward earnings, slightly below a five-year average.
Some dip-buyers stepped in on Friday, but market action suggests that’s likely to be short-lived, with Nasdaq 100 futures slipping 0.7% on Monday.
An analysis by Wilson’s team showed investors aren’t yet enforcing discipline around capital expenditure in a more structural way. Stocks with higher capex-to-sales ratios have continued to outperform the broader market, the strategist said.
He also sees opportunities for companies that adopt AI for use in their core businesses, rather than those creating the technology and infrastructure. The former group is beating the broader market by 1% the day after they report earnings, Wilson said.
His team also cites the boost from a weaker dollar as Nasdaq 100 constituents derive about half their revenues internationally. They also see a broader rebound in earnings upgrades across semiconductors, software, tech hardware and the Magnificent Seven stocks.
By Rose Henderson
With assistance from Sagarika Jaisinghani, Farah Elbahrawy and Michael Msika
