In short
Mike Wilson (Morgan Stanley CIO and Chief U.S. Equity Strategist) argues the “broadening trade” in equities can continue, even as semiconductor leadership fades. He says semis are losing momentum because crowded AI/CapEx expectations are no longer accelerating, and hyperscaler spending guidance/returns may be shifting.
Guest backgrounds
No guests; solo episode by Mike Wilson.
Key claims
Broadening began last November tied to a post–rolling recession expansion (ended April 2025) and operating leverage-driven earnings growth. Iran/oil and bond repricing briefly drove investors back into semis. Now semiconductor earnings-revision breadth is near historical extremes, raising the bar for further improvement.
Notable examples
Hyperscaler underperformance; Meta selling excess capacity to outside customers; rotation targets include consumer discretionary, transports, regional banks, and biotech; biotech benefits in falling-rate regimes and amid an ongoing M&A cycle; Fed Chair Warsh’s comments that inflation risks have come down.
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 Dynamics: Broadening Trade
0:45 to 2:50
Discussion on the broadening trade in equity markets and its implications.
“several times already over the past couple of years with the hyperscalers and semiconductors ebbing and flowing.”
Investment Strategies for Recovery
2:50 to 4:35
Insights into preferred sectors for investment amidst market recovery.
“First, the market should continue to broaden out.”
Conclusion and Call to Action
4:35 to 5:05
Wrap-up of key points and encouragement to engage with the podcast.
“I hope you found it informative and useful.”
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 in the podcast, I'll discuss why I think the broadening out in equity markets can continue. It's Monday, July 6th at 1130 a.m. in New York. So let's get after it. Let's talk about a market dynamic that's becoming harder to ignore. The broadening trade is back and it's gaining momentum partly because one of the most crowded areas of the market, semiconductors, it's finally starting to lose some of its own. To be clear, this doesn't mean the AI cycle is over. However, trends don't move in straight lines, and leadership can ebb and flow, especially if there are fundamental reasons supporting it.
0:44Mike Wilson:In fact, we've seen this happen several times already over the past couple of years with the hyperscalers and semiconductors ebbing and flowing. This is based on positioning, the rate of change on expectations for CapEx, and the returns on that CapEx. Meanwhile, our broadening call goes back to last November. Back then, we argued the economy had entered a new expansion after the rolling recession ended in April of 2025. That view is based on a classic early cycle setup where revenue growth returns to companies that have become cost-efficient. That's the definition of operating leverage, and that always leads to better-than-expected earnings growth, the core differentiation to our original outlook this year.
1:29Mike Wilson:The market started to discount that broadening late last year and into early this year. Then the Iran war interrupted it. Oil prices surged, and the bond market went from pricing Fed cuts to pricing hikes, and investors crowded back into the obvious AI CapEx winners, especially semiconductors. That made sense for a while. The revisions in semis were spectacular. But when earnings revisions' breadth gets pressed against historical extremes, the question becomes less about whether the story is good and more about whether the rate of change can keep improving. That's a much higher bar. And over the past few weeks, the market seems to be asking that question with semiconductor stocks fading.
2:12Mike Wilson:The underperformance in the hyperscalers was probably the first signal. Semis depend on hyperscaler CapEx. So when the spenders start to lag the beneficiaries, that divergence can't last forever. It usually ends up reconciling with the hyperscaler's temporary and capex guidance or indicating that they're more focused on getting a return on that investment. Meta's announcement last week that it would begin selling excess capacity to outside customers fits right into that discussion. It doesn't kill the AI build-out, but it does change the market's perception about how linear that build-out will be.
2:48Mike Wilson:What matters for investors is how they should trade it. First, the market should continue to broaden out. Second, we continue to favor consumer discretionary goods, transports, regional banks, and now biotech as part of that rotation. Discretionary goods remains the cleanest expression in my view because a wallet share shift from services back to goods is underway. Goods pricing is improving, oil prices have fallen, and earnings revisions are strengthening. Transports are also showing better revisions, and regional banks still benefit from the broader recovery, improving loan growth dynamics, and our call for a re-steepening of the yield curve.
3:27Mike Wilson:Biotech deserves more attention here, too. It's also one of the most rate-sensitive areas of the market, and our work shows it has historically done very well in falling rate regimes. If the market's policy expectations are too hawkish, and I think they are, then biotech offers an attractive risk-reward setup, particularly with an M &A cycle that continues to build. The Fed is part of this story as well. Chair Warsh's comments last week that inflation risks have come down should matter, especially after the weaker labor data that came out on Thursday. The market had become too hawkish on policy.
4:03Mike Wilson:If falling energy prices and contained core inflation allow the Fed to stay on hold rather than hike, that should help lower rate expectations and further support broad leadership in equity markets. Bottom line, the major averages may stay choppy because semis are a large part of the index and crowded. But the message is improving beneath the surface. The broader market performance indicates a broader economic and earnings recovery may just be beginning. The best news is that this view is still out of consensus, which means the opportunity for investors remains significant. Thanks for tuning in.
4:40Mike Wilson: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. The 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
A changing macro backdrop is creating new opportunities across the equity market. Our CIO and Chief U.S. Equity Strategist Mike Wilson looks at what's driving the shift and where it may lead next.
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’ll discuss why I think the broadening out in equity markets can continue.
It's Monday, July 6th at 11:30 am in New York.
So, let’s get after it.
Let’s talk about a market dynamic that’s becoming harder to ignore. The broadening trade is back, and it’s gaining momentum partly because one of the most crowded areas of the market – Semiconductors – is finally starting to lose some of its own.
To be clear, this doesn’t mean the AI cycle is over. However, trends don’t move in straight lines, and leadership can ebb and flow; especially if there are fundamental reasons supporting it. In fact, we’ve seen this happen several times already over the past couple of years with the hyperscalers and semiconductors ebbing and flowing. This is based on positioning, the rate of change on expectations for capex and the returns on that capex.
Meanwhile, our broadening call goes back to last November. Back then, we argued the economy had entered a new expansion after the rolling recession ended in the April of 2025. That view was based on a classic early-cycle setup where revenue growth returns to companies that had become cost efficient. That is the definition of operating leverage and that always leads to better than expected earnings growth – the core differentiation to our original outlook this year.
The market started to discount that broadening late last year and into early this year. Then, the Iran war interrupted it. Oil prices surged, and the bond market went from pricing Fed cuts to pricing hikes, and investors crowded back into the obvious AI capex winners – especially Semiconductors.
That made sense for a while. The revisions in Semis were spectacular. But when earnings revisions breadth gets pressed against historical extremes, the question becomes less about whether the story is good and more about whether the rate of change can keep improving. That’s a much higher bar. And over the past few weeks, the market seems to be asking that question with semiconductor stocks fading.
The underperformance in the hyperscalers was probably the first signal. Semis depend on hyperscaler capex, so when the spenders start to lag the beneficiaries, that divergence can’t last forever. It usually ends up reconciling with hyperscalers’ tempering capex guidance or indicating they are more focused on getting a return on that investment. META’s announcement last week that it would begin selling excess capacity to outside customers fits right into that discussion. It doesn’t kill the AI buildout, but it does change the market’s perception of how linear that buildout will be.
What matters for investors is how they should trade it.
First, the market should continue to broaden out. Second, we continue to favor Consumer Discretionary Goods, Transports, Regional Banks, and now Biotech as part of that rotation. Discretionary Goods remains the cleanest expression, in my view, because the wallet-share shift from services back to goods is underway, goods pricing is improving, oil prices have fallen, and earnings revisions are strengthening. Transports are also showing better revisions, and Regional Banks still benefit from the broader recovery, improving loan growth dynamics and our call for a re-steepening of the yield curve.
Biotech deserves more attention here, too. It is also one of the most rate-sensitive areas of the market, and our work shows it has historically done very well in falling-rate regimes. If the market’s policy expectations are too hawkish – and I think they are – then Biotech offers an attractive risk-reward setup, particularly with an M&A cycle that continues to build.
The Fed is part of this story as well. Chair Warsh’s comments last week that inflation risks have come down should matter, especially after the weaker labor data that came out Thursday. The market had become too hawkish on policy. If falling energy prices and contained core inflation allow the Fed to stay on hold rather than hike, that should help lower rate expectations and further support broader leadership in equity markets.
Bottom line, the major averages may stay choppy because Semis are a large part of the index and crowded. But, the message is improving beneath the surface. The broader market performance indicates a broader economic and earnings recovery may just be beginning. The best news is that this view is still out of consensus, which means the opportunity for investors remains significant.
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!