Morgan Stanley says a cyclical slowdown in global tech is all but certain next year. “Our base case is that a cyclical slowdown is all but certain in 2025,” it said in an Aug. 20 report, adding that it would be driven by a “likely reversal” in the rate of change in revenue growth and tight supply and demand conditions. “Certain technology sectors — such as semiconductor materials and the AI supply chain — could be hit particularly hard given higher pricing volatility and operating leverage,” the bank said. However, it added that the effects are likely to be felt across all technology sectors. A guide to a potential peak cycle Morgan Stanley says the semiconductor industry is in the late cycle, moving “from optimism to euphoria,” with the risk-reward profile no longer attractive. Chips have been riding the AI boom but the next phase of AI trading “may not be so simple,” the bank said. “The key question is ‘pushing forward’ in AI demand in 2025 and 2026, as no one is discussing the near-term demand for GPUs,” she added. Over time, AI use-case applications will be more valuable than infrastructure, she said. “Despite the current shortage of AI computing chips, we need to remember that this is not a train that will continue forever — AI chips will eventually catch up with demand, become cyclical and the current pace of gains will be difficult to sustain,” Morgan Stanley wrote, adding that it expects top-line growth to start slowing through 2025. “In our view, it is always best to avoid overpaying for stocks late in the cycle, even if this does not allow us to accurately time the peak. Once we pass the peak, it is like any other cycle,” Morgan Stanley said. To prepare for such tech downturns, go for good names with strong free cash flows, as well as stocks with cheap valuations. Companies whose revenues have proven to hold up better during downturns have been more resilient than the tech sector and the broader market, the bank said. “This also includes companies whose product demand is consistent and repeatable,” the bank said. Stocks It added that many tech sectors, as well as individual stocks, have a mix of defensive, countercyclical and growth opportunities that should help them outperform in a correction. “Eventually the storm will pass and the traditional leaders — Samsung, TSMC and Apple, for example — will be at the forefront of the next tech growth curve,” it said. Here are the US stocks Morgan Stanley still favors. US semiconductor company Nvidia has been the preferred stock to play the AI trade, but Morgan Stanley says it may be too early to pinpoint a top. The bank said AI spending remains resilient, and Nvidia is well positioned to monetize those investments at a higher rate than before. “If the AI cycle is coming to an end, we would favor NVDA over its suppliers and competitors,” she said, explaining that the stock correction could be more severe for secondary components. US IT Hardware Historically, IT hardware bull cycles last four to six quarters, and the sector has strongly outperformed the S&P 500, the bank said. Right now, it’s only two to three quarters into a bull cycle, which could last for nearly six quarters. The bank’s preferred stocks in this space are Apple, Seagate and Dell. US Networking Morgan Stanley says Ethernet names exposed to AI could outperform, referring to a type of networking standard. Networking in traditional technology terms refers to a network of devices that can transmit and share information over physical or wireless connections. However, in AI, the demands are higher due to large language models and other AI applications that require extremely high bandwidth and low latency. It sees Arista Networks as best positioned to capitalize on this opportunity, calling it “the highest performing networking name.” Here are some of the global names Morgan Stanley has listed as its “top fundamental picks.” Samsung Electronics: The “qualitative rotation” that occurs during downturns will start to favor Samsung’s more defensive characteristics, such as earnings stability, over growth, the bank said. TSMC: Morgan Stanley likes TSMC’s “quality and defensive” nature during a semiconductor downturn. Quanta: The bank says the laptop maker has a strong balance sheet and generates strong cash flows, with growing exposure to data center AI infrastructure. — CNBC’s Michael Bloom contributed to this report.
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How to Position Yourself for a Global Tech Slowdown, According to Morgan Stanley
