Michael Wilson at Morgan Stanley predicts that momentum-focused equity investing will rebound from its recent slump, and that companies with robust earnings, not semiconductor makers, will lead the market's climb.
The approach of buying shares with the strongest recent returns - known as momentum investing - had become one of the market's most popular trades before the recent stumble. Some portfolio managers are now reassessing their exposure after the sharp unwind.
Wilson has described the recent episode as one of the "worst momentum selloffs in history," and he now sees investor preference shifting toward higher-quality names with consistent profitability. He also sees growing interest in insurance and healthcare equipment/services companies.
This year that meant large technology names and chipmakers. When those leaders stumbled, the concentrated bets quickly unwound. The recent retreat was notable not only for its speed but also because it came during an otherwise strong earnings season.
Recent weeks have seen a broad selloff in global semiconductor shares as concern builds over the massive capital-spending plans at top technology companies.
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"As the business cycle matures and post-recession operating leverage moderates, we believe leadership should rotate from low quality toward companies with more stable earnings, strong margins and operational efficiency," Wilson said.
Wilson argues that the S&P 500 has shifted toward more stable, profitable companies and that earnings forecasts are improving across a wider group of stocks, supporting his year-end target of 8,000. Friday's close was 7,489.72.
That breadth supports the view that index gains can continue even as leadership rotates away from chips, which is why many strategists still see profits underpinning equities.
At the same time, the market's recent swings show how quickly a crowded trade can unwind. The momentum basket tracked by Goldman Sachs remains 35% below its June high, even though the overall S&P 500 is still not far from record territory. If earnings revisions continue to broaden beyond the biggest AI-related companies, strategists expect profit growth to keep providing support. A 9.4% gain for that basket this year is still roughly in line with the S&P 500, underscoring how much of the momentum trade's damage is concentrated in the recent drawdown.
Across Morgan Stanley, Goldman Sachs and JPMorgan Chase, analysts agree that semiconductor weakness is close to running its course, and they expect corporate profits to keep underpinning equities.
Goldman's Ben Snider says the recent cooling in AI-related trades is a normal part of momentum cycles. Investor deleveraging, he added, should "suggest an improved outlook going forward," with the payoff dependent on how upcoming earnings hold up.
JPMorgan's Mislav Matejka repeated his stance that AI and tech more broadly won't lead in the second half; instead, he sees market strength broadening. But because chip stocks are trading near oversold territory and EPS momentum is still rising, he sees the group steadying.
"Earnings are coming in strong, we believe they will stay a support for the equity market," Matejka said.
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