Morgan Stanley — Japan Quant Strategy: Navigating the Tougher Second Half of the AI Trade
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Morgan Stanley's Japan quant strategy note argues the AI rally has entered a more challenging second half: earnings growth still supports AI- and semiconductor-related stocks, but rising long-term rates and elevated valuations increase fragility. US equity strength is narrower than it appears—six mega-cap stocks account for most of the S&P 500's gains, masking negative performance elsewhere in the index. The strategists see parallels with the dot-com era, including supply pressure from IPOs and secondary offerings, and advise investors to retain some AI exposure while gradually reducing concentration in the theme. To brace for a potential correction, they recommend tactically overweighting low-volatility stocks, whose factor valuation sits near historical lows and offers defensive value, and maintaining positions in financially sound value stocks to capture any rotation in market leadership. They flag a possible turning point in December and into the new year, with monetary tightening the key swing factor for sustainability. Hyperscaler capital expenditure remains a support, but the report emphasizes managing concentration risk rather than abandoning the AI theme.
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