Morgan Stanley's Bold Take on the Stock Market

Morgan Stanley believes that Mr. Market has committed an error.

Strategist Katie Huberty, conversing withBloomberg, presented the argument that the recent decline in the stock market has not been limited. In fact, she contends that it has been "indiscriminate" where investors keep selling off stocks associated with theAI trade without separating the grain from the husks.

Huberty's main argument is that we are still in the initial stages of what might evolve into a significant development$10 trillion capital-spending cycle, fueled by significant improvements in efficiency.

Nevertheless, markets typically do not follow straight paths, which is why it's simple to miss the subtleties when positions change rapidly.

The software and services sector has faced significant challenges recently. To provide some background, here are five of the largest enterprise-software companies that have experienced major setbacks in the last month.

Atlassian: -37.31%
Workday: -24.21%
Palantir: -20.47%
Salesforce: -18.75%
ServiceNow: -16.65%
Source: MarketWatch

At the same time, we contend that leadership is expanding, and the implementation of AI goes beyond just the high-profile chip manufacturers and major cloud providers.

I covered Bank of America analyst Michael Hartnett, who shared a comparable perspective, cautioned that the stock market's "easy" leadership period is rapidly coming to an end.

Considering this development, he contended that investors ought to focus on "overlooked" areas of the market, such as small caps, REITs, and emerging markets, as these sections are the initial ones to demonstrate a rotation.

If Huberty's assessment is accurate, this could signal the start of a significant shift in the AI market rather than the conclusion.

Forecasts for the S&P 500 at the end of 2026 on Wall Street

Morgan Stanley:7,800 (year-end 2026 target)
J.P. Morgan:7,500(2026 year-end goal, with an upside scenario exceeding 8,000 if the Fed reduces rates further)
Bank of America Global Research:7,100(2026 year-end goal, a more conservative "priced for perfection" approach)
Barclays:7,400(target for 2026 end following an increase in its projection)
UBS Global Research:7,500(2026 year-end goal tied to AI progress in addition to financial performance)
Source: Reuters

The marketplace could be overlooking the upcoming generation of AI pioneers

We are not observing selective selling in the stock market, where a group of financially robust companies are being reduced without much consideration.Huberty arguesShe thinks the main change is moving from AI developers to AI users.

As per Morgan Stanley's data, companies that have been actively integrating AI into their processes are seeing an increase in profit margins.at nearly halfthe speed of key indicators such asthe S&P 500 and MSCI World.

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Nevertheless, even with the notable increase in profit margins, the major enterprise software companies did not receive recognition for their results.

By recognizing this gap, the company accurately mapped 3,600 stocks five times, monitoring shifts in AI involvement, financial reliability, pricing control, and data benefits.

The recurring theme from the analysis was data barriers.

Companies that have access to large amounts of exclusive credit and market data, as well as financial systems of record or customer information, are in the ideal position to effectively generate revenue through AI.

AI leadership is expanding beyond major technology companies

Huberty also proposed that the "rate of change" in AI exposure might be significantly higher beyond the tech industry right now, particularly in fields such asconsumer, apparel, durable goods, autos, and energy/utilities.

Additionally, the latest price movements support this idea, as leadership is expanding beyond major technology companies.

Recent industry performance supports the shift theoryUsing standard ETF indicators for the categories she mentioned, here's what has been occurring lately.

Benchmarks for context
S&P 500 (SPY): -1.04% over one month and +3.30% over three months Technology (XLK): -3.72% over one month and -0.20% over three months Source: Barchart
ETFs that represent different categories
Automobiles (proxy: CARZ): +2.28% (1-month) and +17.44% (3-month) Durable goods or housing-related cyclical stocks (proxy: XHB): +3.36% (1-month) and +18.62% (3-month) Durable goods/home building (proxy: ITB): +2.87% (1-month) and +18.33% (3-month) Apparel or retail-related (proxy: XRT): -2.65% (1-month) but +12.37% (3-month) Consumer (broad discretionary proxy: XLY): -4.96% (1-month) and +3.55% (3-month). Source: Barchart

Therefore, in the last three months, automobile companies, home construction firms, and retail stocks have performed better than both the S&P 500 and the tech sector, supporting Huberty's assertion that leadership is expanding beyond large-cap AI stocks.

Nevertheless, if we examine matters from a one-month viewpoint, it indicates that the rotation is continuing but not in a direct path.

Interestingly, Mike Wilson from Morgan Stanley expressed a comparable idea regarding stock market breadth in another contextBloomberg interview.

Related: Cathie Wood invests $14 million in declining AI stocks