global tech downturn expected, focus on semiconductor and AI sectors

Morgan Stanley has projected a cyclical downturn in the tech sector, expected to occur in 2025, driven by a reversal in revenue growth and tight supply-demand conditions. The semiconductor industry is identified as being in a late cycle, transitioning from optimism to euphoria, which raises concerns about the risk-reward balance for investors. The bank emphasizes the importance of understanding the 'pull forward' in AI demand, particularly for graphics processing units, as AI applications are anticipated to gain more value over time compared to infrastructure. Despite the current shortage of AI computing chips, Morgan Stanley warns that this demand surge is not sustainable indefinitely, predicting that AI chips will eventually align with demand, leading to cyclical challenges. The bank advises investors to avoid overpaying for stocks as the cycle matures, suggesting a focus on quality companies with strong free cash flows and stable product demand. In terms of stock recommendations, Morgan Stanley highlights several sectors and companies that may perform well during a downturn. IT hardware is noted for its historical resilience, with companies like Apple, Seagate, and Dell identified as strong performers. Additionally, networking companies with AI exposure are expected to outperform, given the high bandwidth and low latency requirements of AI applications. The report concludes that traditional tech leaders such as Samsung, TSMC, and Apple are well-positioned to benefit from the next growth cycle once the current challenges subside, suggesting a potential recovery in the tech sector following the anticipated downturn.