Morgan Stanley Predicts a Cyclical Downturn in Global Tech in 2025
Morgan Stanley is predicting a cyclical downturn in the global tech sector in 2025, citing a likely "reversal" in the rate of revenue growth and tight supply-demand conditions. While the bank acknowledges the impact will be felt across all sectors, it believes certain segments like semiconductor materials and the AI supply chain will be hit hardest due to increased volatility in pricing and operating leverage.
Key Takeaways:
- Cyclical Downturn in 2025: Morgan Stanley expects a tech downturn driven by slowing revenue growth and supply-demand pressures.
- Semiconductors and AI Supply Chain at Risk: These segments are predicted to be hit hardest due to volatility and higher operating leverage.
- AI Demand May Slow: The bank cautions that the "pull forward" on AI demand in 2025-2026 may not sustain its current pace, even with strong near-term demand for GPUs.
- Shift to Quality and Defensive Stocks: Morgan Stanley recommends investors focus on companies with strong free cash flows, cheap valuations, and consistent revenue streams that hold up well during recessions.
- Traditional Leaders to Re-emerge: The bank expects established players like Samsung, TSMC, and Apple to dominate future tech growth cycles after the downturn.
A Peek into the Tech Cycle and its Potential Peak
The semiconductor industry, according to Morgan Stanley, is currently in the late stage of its cycle, transitioning from "optimism to euphoria." This shift indicates that the risk-reward proposition for the sector is no longer as attractive. While AI has fueled the growth of the chip industry, the bank believes the next wave of AI-driven investments may be less predictable.
The bank emphasizes that despite current shortages of AI computing chips, the demand will eventually catch up, leading to a more cyclical and potentially less robust market for these chips.
Morgan Stanley expects topline growth to moderate into 2025. It asserts that investors should prioritize avoiding overpaying for stocks as the cycle peaks, as this approach can help mitigate potential losses during the downturn.
Navigating a Potential Tech Correction: The Morgan Stanley Strategy
To navigate a potential downturn, Morgan Stanley suggests focusing on quality names with robust free cash flows and cheap valuations. Companies with proven revenue resilience during recessions and consistent, repeatable demand are also considered particularly valuable during this period.
Several tech sectors and individual stocks are identified by Morgan Stanley as possessing a combination of defensive, countercyclical, and growth characteristics making them potentially resilient even in a downturn.
Morgan Stanley’s Top Picks: A Glimpse into the Future of Tech
U.S. Semiconductors:
- Nvidia: Despite its dominance in the AI market, Morgan Stanley advises caution about calling the top for Nvidia stock. While AI spending remains strong, the bank acknowledges the risk of an inventory correction in the sector and favors Nvidia over its suppliers and competitors due to its more resilient position.
U.S. IT Hardware:
- Apple: Apple is a strong contender within the IT hardware sector, according to Morgan Stanley, given its established market position and consistent revenue streams.
- Seagate and Dell: These companies are also identified by Morgan Stanley as promising investments within the IT hardware space.
U.S. Networking:
- Arista Networks: The bank sees this company as a key player in the AI networking sphere, particularly due to its high-performance offerings that cater to the demands of large language models and other AI applications.
Global Names:
- Samsung Electronics: Morgan Stanley views Samsung’s stability and defensiveness as key strengths during a downcycle, particularly in its ability to sustain earnings amidst market fluctuations.
- TSMC: The bank emphasizes TSMC’s strong quality and defensive nature as key advantages during a potential semiconductor downturn.
- Quanta: This laptop maker is considered a solid pick due to its strong balance sheet, robust cash flow, and growing exposure to AI infrastructure within data centers.
Key Points to Remember:
- The tech sector is expected to experience a cyclical downturn in 2025.
- Morgan Stanley advises prioritizing quality stocks with strong free cash flow and defensive characteristics.
- AI demand is likely to slow, but Nvidia is favored over its suppliers and competitors.
- Samsung, TSMC, and Apple are identified as potential winners in the long term.
While the potential for a tech downturn poses challenges, investors can navigate these waters by focusing on established companies with strong financial foundations and a proven track record of resilience. The tech sector is known for innovation and adaptability, and its resilience in the face of cyclical challenges has been demonstrated time and again. As Morgan Stanley suggests, "Eventually the storm will pass and the traditional leaders… will have pole position for the next tech growth curve."
