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Some of the “luster” has come off the AI trade, Morgan Stanley’s Mike Wilson says.
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Wilson says investors are now taking shelter in defensive shares as they wait for new themes to emerge.
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Wilson sees defensive plays in sectors like utilities, consumer staples and healthcare.
With investors growing impatient over returns on AI investments, they’re desperately looking for the next big thing.
In the meantime, they should take shelter in quality defensive stocks, Morgan Stanley says.
For the “AI dream” long held by investors, “a little bit of that luster has come off,” the firm’s chief US equity strategist Mike Wilson told Bloomberg Surveillance in a Tuesday interview.
Wilson said he gauges AI’s fall by looking not just at top players like Nvidia, but at the semiconductor industry as a whole.
“A lot of those stocks have really come off. And that makes sense to me. We just got overcooked on the whole AI theme,” Wilson said.
Semiconductor shares have seen an almost 7% fall since Nvidia’s earnings report missed investors’ sky-high expectations. The sector’s biggest name has seen an outsize drop in its share price in the time since, falling roughly 13%.
Wilson says the AI downturn doesn’t necessarily spell doom for the industry, but that it rather reflects Morgan Stanley’s vision that it will reap benefits, and returns, in the longer term.
“We’re not believers that this is going to change productivity materially in the short-term. That’s a long term story,” he said.
With the AI rally fading for now, Wilson says investors are waiting for a new theme to emerge, and taking shelter in “quality defensive stocks” in the meantime.
“With that theme now gone, the market is looking for a new theme. On the growth side, there isn’t one, so what it does is it hunkers down into defensive, high-quality assets until we get the next thing. Whether that’s a bad outcome or a positive outcome, they’re going to hide out in these areas,” he said.
He recommends quality defensive stocks in areas like utilities, staples and healthcare, which are poised to do well amid a slowing labor market, he said in a Monday note.
“In our view, a slowing labor market is consistent with a late cycle backdrop and quality + defensive leadership,” Wilson wrote.
Last month, Wilson’s team added three new quality defensive stocks to its “Fresh Money Buy List,” which now totals nine stocks.
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