In short
Market volatility is explained as a rotation: the “broadening trade” is returning as semiconductors lose momentum and leadership shifts from crowded AI/hyperscaler exposure to other improving fundamentals.
Key claims
semiconductor earnings revisions are near peak; hyperscalers have lagged semis before, and this pattern repeats (ChatGPT-era has seen three prior ebb/flow cycles; this is the fourth, with hyperscalers likely to outperform semis). Indexes may look choppy because large-cap unwinds can drag the S&P 500 even while the broader market improves; S&P 500 could dip toward 7,000 then move to 8,000 by year end.
Notable examples
prior leadership rotations in precious metals and energy; current hyperscalers outperform semis by ~30% recently.
Guests
no guests mentioned; host is Mike Wilson (Morgan Stanley CIO and Chief U.S. Equity Strategist).
Written by AI. May contain mistakes. Listen to the episode to check what was said.
Chapters
Tap a time to open that second in VOMarket Volatility Explained
0:18 to 1:15
Understanding the recent market volatility and its implications.
“Importantly, there's a key reason this broadening trade is likely to continue.”
Investment Opportunities Amidst Changes
1:15 to 2:28
Identifying sectors likely to benefit from current market adjustments.
“Investors piled into the AI trade, especially semis, as oil prices jumped and Fed expectations shifted more hawkish.”
Federal Reserve Impacts
2:28 to 3:37
Analysis of how Fed policy affects market dynamics.
“as 7 ,000 before it makes a move to 8 ,000 by year end.”
Transcript
Automatic transcript. May contain errors.0:00Mike Wilson:Welcome to Thoughts on the Market. I'm Mike Wilson, Morgan Stanley CIO and Chief U.S. Equity Strategist. Today on the podcast, I'll explain why the recent volatility in markets makes sense. It's Wednesday, July 22nd at 2 p.m. in New York, so let's get after it. The broadening trade is back and it's gaining steam. We established this thesis last week. Importantly, there's a key reason this broadening trade is likely to continue. One of the more crowded areas of the market, semiconductors, has lost its momentum. As I've noted before, this is not a call that the AI cycle is over. However, stocks do trade on the rate of change and growth, and expectations often reach a place where they can no longer surprise on the upside.
0:46Mike Wilson:Earnings revisions tend to get too stretched and capital starts looking for a next place where the fundamentals are improving, but positioning is still light. This is no different than what happened to other leadership groups earlier this year in areas like precious metals and energy stocks. Remember, I first made the call for market broadening in our November outlook. My view is that the economy had moved into a new expansion after the rolling recession ended in April of 2025, and markets were starting to catch on before the Iran conflict interrupted that trend. Investors piled into the AI trade, especially semis, as oil prices jumped and Fed expectations shifted more hawkish.
1:24Mike Wilson:But back in June, I noted that those earnings revisions were likely nearing their peak. Hyperscalar stocks started to lag was the first indication. Since semis ultimately depend on hyperscalar spending, that divergence usually doesn't last. It doesn't mean the build out is ending. However, the spenders may be moving from blind enthusiasm to a more disciplined phase as a means of addressing the market's concerns about falling cash flows. We've seen this pattern before. Since ChatGPT launched, this ebbing and flowing between the hyperscaler and semi stocks has happened three times. This is the fourth such adjustment during which the hyperscaler stocks are likely to outperform the semis.
2:04Mike Wilson:Since a few weeks back, hyperscalers have outperformed semiconductors by almost 30 percent. Another consequence is that the major averages may trade lower in the near term. When a crowded large cap leadership group is unwinding, the index can look choppy even as the market underneath is improving. That's the key distinction. The index may struggle, but the broadening can still work. Over the next month, don't be surprised if the S &P 500 trades as low as 7 ,000 before it makes a move to 8 ,000 by year end. Use this weakness to add to equity positions. I continue to like consumer discretionary goods, transports, and biotech.
2:44Mike Wilson:Discretionary goods remains one of the cleaner expressions of the broadening thesis. Wallet shares shifting from services back toward goods. Goods pricing is improving, and earnings revisions are strengthening. Transport's continue to show improving revisions as volumes stabilize and pricing gets better. And biotech is one of the more attractive lower-rate beneficiaries, especially if policy expectations are too hawkish, as I think they are. On that last point, the Fed backdrop matters. The June FOMC meeting told us forward guidance is going to be limited, and the inflation path is going to drive policy.
3:19Mike Wilson:The softer than expected inflation data last week should allow the Fed to stay on hold rather than hiking. It may take the bond market a few more data points to fully reprice this view. Bottom line, the broadening is in gear, but it may not feel comfortable because it's happening while the crowded momentum trade unwinds, a process that is likely unfinished. That's usually how rotations in market leadership work. Like spring, it's often in like a lion and out like a lamb. Thanks for tuning in. I hope you found it informative and useful. Let us know what you think by leaving us a review. And if you find thoughts on the market worthwhile, tell a friend or colleague to try it out.
4:01The preceding content is informational only and based on information available when created. It is not an offer or solicitation, nor is it tax or legal advice. It does not consider your financial circumstances and objectives and may not be suitable for you.
From the publisher
Our CIO and Chief U.S. Equity Strategist Mike Wilson explains why market leadership is rotating beyond semiconductors and where investors may find opportunities despite near-term volatility.
Read more insights from Morgan Stanley.
----- Transcript -----
Welcome to Thoughts on the Market. I'm Mike Wilson, Morgan Stanley’s CIO and Chief U.S. Equity Strategist.
Today on the podcast, I will explain why the recent volatility in markets makes sense.
It's Wednesday, July 22nd at 2 p.m. in New York.
So, let’s get after it.
The broadening trade is back and it’s gaining steam. We established this thesis last week. Importantly, there’s a key reason this broadening trade is likely to continue. One of the more crowded areas of the market—semiconductors—has lost its momentum.
As I’ve also noted before, this is not a call that the AI cycle is over. However, stocks do trade on the rate of change in growth, and expectations often reach a place where they can no longer surprise on the upside.
Earnings revisions tend to get too stretched, and capital starts looking for the next place where fundamentals are improving but positioning is still light. This is no different than what happened to other leadership groups earlier this year in areas like precious metals and energy stocks.
Remember, I first made the call for market broadening in our November outlook. My view is that the economy had moved into a new expansion after the rolling recession ended in April 2025. Markets were starting to catch on before the Iran conflict interrupted that trend. Investors piled back into the AI trade—especially semis—as oil prices jumped and Fed expectations shifted more hawkish.
Back in June, I noted that those earnings revisions were likely nearing their peak. Hyperscale stocks starting to lag was the first indication. Since semis ultimately depend on hyperscaler spending, that divergence usually doesn’t last. It doesn’t mean the buildout is ending. However, the spenders may be moving from blind enthusiasm to a more disciplined phase as a means of addressing the market’s concerns about falling cash flows.
We’ve seen this pattern before. Since ChatGPT launched, this ebbing and flowing between the hyperscaler and semiconductor stocks has happened three times. This is the fourth such adjustment, during which the hyperscaler stocks are likely to outperform the semis. Since a few weeks back, hyperscalers have outperformed semiconductors by almost 30 percent.
Another consequence is that the major averages may trade lower in the near term. When a crowded, large-cap leadership group is unwinding, the index can look choppy even as the market underneath is improving.
That’s the key distinction. The index may struggle, but the broadening can still work. Over the next month, don’t be surprised if the S&P 500 trades as low as 7000 before it makes a move to 8000 by year-end. Use this weakness to add to equity positions.
I continue to like Consumer Discretionary Goods, Transports, and Biotech.
Discretionary Goods remains one of the cleaner expressions of the broadening thesis. Wallet share is shifting from services back toward goods, goods pricing is improving, and earnings revisions are strengthening. Transports continue to show improving revisions as volumes stabilize and pricing gets better. Biotech is one of the more attractive lower-rate beneficiaries, especially if policy expectations are too hawkish, as I think they are.
On that last point, the Fed backdrop matters. The June FOMC meeting told us forward guidance is going to be limited, and the inflation path is going to drive policy. The softer-than-expected inflation data last week should allow the Fed to stay on hold rather than hiking. It may take the bond market a few more data points to fully re-price this view.
Bottom line, the broadening is in gear, but it may not feel comfortable because it’s happening while the crowded momentum trade unwinds, a process that is likely unfinished. That’s usually how rotations in market leadership work.
Like spring, it’s often: in like a lion and out like a lamb.
Thanks for tuning in. I hope you found it informative and useful. Let us know what you think by leaving us a review. And if you find Thoughts on the Market worthwhile, tell a friend or colleague to try it out!