The AI trade is shape-shifting

Wall Street agrees that the AI trade is far from over—but the pros just can’t decide which corner of the market is the next big thing.

The semiconductor rally has been taking a breather on the heels of a mind-boggling run in the first half of the year: The popular Philadelphia Semiconductor Index soared 99% between the beginning of 2026 and its all-time high on June 22, but is now down roughly 12% from that peak.

According to a note from Morgan Stanley chief US equity strategist Mike Wilson, the carnage in semis (and especially in memory stocks) won’t end anytime soon: After all, earnings revisions for the sector are at a historical high, and investors are understandably wondering just how much juice is left, given sky-high valuations.

But Wilson argues that a downturn in semis isn’t evidence that the AI boom as a whole is overblown. In fact, he thinks that this is a healthy correction, and the fourth normal dip since ChatGPT’s launch back in 2022.

“We’ve seen relative performance oscillate between the various types of AI beneficiaries over the past couple of years and we expect those rotations to continue as the cycle evolves,” Wilson wrote today. “This is simply the next rotation, in our view—Semis to the Hyperscalers and other broadening trades.”

It’s time for a reshuffling: Now, Wilson says it’s time for investors to shift focus from semiconductors to hyperscalers (think Microsoft, Amazon, and Alphabet). For one, they’ve underperformed relative to chipmakers over the past few months, which means that the chief concern facing these companies—gargantuan capex spending—has already been priced into their shares. News that Meta is selling excess computing power could be bullish for the sector, too, according to Wilson.

Wilson also argues that a bigger market shift is coming: Instead of mega-caps carrying the market, gains will come from a wider array of sectors and companies. He points to consumer discretionary stocks, which he says should get a boost from falling oil prices and easing inflation. He also recommends biotech, given that the sector usually performs well when interest rates fall; M&A in the sector is already increasing.

Plenty of ways to skin the AI cat

But other Wall Street analysts are taking a different approach: A group of JPMorgan strategists argue that right now is the best time to buy the dip in semiconductors, given that the imbalance in supply and demand won’t even out until 2028.

And unlike Wilson, these analysts are less excited about the rest of the AI trade, including the Magnificent Seven. They also argue that investors should be aware of the industries most susceptible to AI “cannibalization,” including media, software, and business services.

Others on the Street believe that chips are still king, but that it’s time to look elsewhere in the supply chain. For example, UBS global head of equities Ulrike Hoffmann-Burchardi thinks that the hardware downturn is an opportunity to double down on the “picks and shovels” of the AI boom.

“Supply bottlenecks in the AI value chain have continued to move upstream—from GPU systems in 2023-25, server components over the past year, to potentially semiconductor equipment over the next six months,” Hoffmann-Burchardi wrote. “We favor semiconductor equipment, foundries, CPU-related compute infrastructure, and memory within the “picks and shovels” of the AI build-out, but we also see value in defensive areas such as payment networks and data center REITs.”

We’ll give you the same advice we give ourselves after devouring a party-size bag of Doritos: Chips are good—but you need some variety.—LB