(Bloomberg)– U.S. tech stocks have room to rally further, according to Morgan Stanley strategists, as the buzz around artificial intelligence underpins a strong sales outlook.
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 “attractive entry points” for some names like Microsoft Corp. and Intuit Inc.
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“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 reassuring to investors who have begun to question the benefits of massive investments in AI. The Nasdaq 100 suffered its biggest weekly decline since December, while stocks deemed at risk of being disrupted by AI also fell following the release of a new tool.
The Bloomberg Magnificent Seven Index now trades at around 29 times forward earnings, slightly below the five-year average.
Some dip buyers came in on Friday, but market developments suggest that will likely be short-lived, with Nasdaq 100 futures slipping 0.7% on Monday.
An analysis by Wilson’s team showed that investors are not yet applying more structural discipline around capital spending. Stocks with higher capex-to-sales ratios continued to outperform the broader market, the strategist said.
He also sees opportunities for companies that adopt AI to use it in their core businesses, rather than those that create the technology and infrastructure. The first group beats the broader market by 1% the day after its results were released, Wilson said.
His team also cites the impact of a weaker dollar, since Nasdaq 100 companies get about half of their revenue internationally. They also see a broader rebound in earnings improvements in semiconductors, software, technology hardware and Magnificent Seven stocks.
–With help from Sagarika Jaisinghani, Farah Elbahrawy and Michael Msika.
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