Chip stocks fall into a bear market, JPMorgan calls for a "summer bottom-picking," while Morgan Stanley continues to bet on cloud giants.

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As chip stocks experience a deep correction, two major Wall Street giants have sharply diverged in their outlook—JP Morgan believes the buying opportunity is approaching, while Morgan Stanley maintains that hyperscalers are more attractive and remains cautious about chip stocks regaining market leadership.

The Philadelphia Semiconductor Index (SOX) dropped 10% last week, marking its worst weekly performance since April 2025. It has now fallen more than 20% from the record closing high set a month ago, officially entering a technical bear market.

Against this backdrop, JP Morgan's strategist team believes that chip stocks "will soon begin to find buying support," suggesting investors take the opportunity to rebuild positions this summer; Morgan Stanley's strategist team forecasts that even if chip stocks rebound, they are unlikely to reclaim market leadership in the second half of this year, and prefers holding hyperscalers.

JP Morgan: Chip stocks near oversold, summer may bring opportunities to reposition

JP Morgan's strategist Mislav Matejka’s team believes that the recent correction in chip stocks reflects more of money rotation and waning momentum trades, rather than a deterioration in industry fundamentals.

The team points out that the Relative Strength Index (RSI), a measure of market momentum, is rapidly approaching oversold territory, and the momentum factors that previously drove chip stocks higher have cooled down significantly. Meanwhile, chip companies' earnings remain strong and current valuations are still supported.

From a supply and demand perspective, JP Morgan believes that new effective capacity in the semiconductor industry will remain limited until 2028, and short-term supply pressures are not prominent.

The team states that if hyperscalers continue strong capital expenditure guidance, chip stocks may see repositioning opportunities this summer. However, JP Morgan also cautions that unwinding momentum factors and money rotation often amplify market volatility, and investors need to be wary of short-term fluctuations.

Meanwhile, JP Morgan remains cautious about how hyperscalers will turn massive AI capital investments into actual profits, and continues to maintain a bearish outlook on industries such as software, business services, and media, which could be impacted by AI substitution.

Morgan Stanley: Chips may rebound, but market leadership may not return

By contrast, Morgan Stanley's strategist Mike Wilson’s team is more cautious about chip stocks' prospects. The team believes that after a more than 20% correction, a technical rebound in chip stocks is not surprising, but this does not mean the sector can regain market dominance.

"Market gains are spreading to more broad-based sectors," Wilson’s team said. They expect that after this round of adjustment, sectors such as consumer discretionary and transportation may become new drivers for continued market gains.

Within the main AI investment theme, Morgan Stanley prefers hyperscalers. The team believes that these companies have stronger core business support, will hold an advantage in the development of Agentic AI, and have the space to improve profitability through cost optimization.

However, Morgan Stanley also notes that over the past three weeks, hyperscalers have outperformed chip stocks by about 30 percentage points, and the short-term risk-reward ratio has declined.

S&P 500 year-end target still at 8000, but watch for support at 7000

For the broader market, Morgan Stanley maintains its year-end S&P 500 target at 8000, believing this target remains achievable.

The team states that the S&P 500’s consolidation and fluctuations over the past two months are in line with previous expectations, and market structure is shifting from the leadership of a few tech giants to broader sector participation.

But Morgan Stanley also warns that if momentum unwinding spreads further, or if the situation in the Middle East escalates, the S&P 500 could face further adjustment pressure and seek support near 7000. This level is seen as an important technical support area before a renewed bullish trend.

As of press time, US stock index futures were generally higher, with S&P 500, Dow Jones, and Nasdaq futures all rising. However, geopolitical risks persist, and the market is still closely watching the Middle East situation for its impact on risk assets.

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