The US equity rally is broadening from semiconductor momentum trades toward wider and higher-quality earnings revisions

Overview

This report is Morgan Stanley’s US equity strategy weekly note, focusing on the process by which US equity leadership is broadening from earlier semiconductor and momentum trades into a wider set of sectors. The report believes the index level may still struggle to rise quickly, and that corrections in prior leaders could bring further consolidation, but this does not change the view that the bull market will recover by year-end. Supporting factors include accelerating median-stock earnings growth, measurable benefits from AI adoption, expected declines in oil prices, a Fed remaining on hold, and improving earnings revisions in consumer, transportation, and quality factors.

Core views

The report’s core views are: first, market breadth broadening is continuing, with improved performance in equal-weight indices and cyclically favored sectors; second, semiconductor momentum trades have not fully cleared, and declining earnings revision breadth plus commodity-like volatility mean caution is still warranted in the short term; third, hyperscalers remain attractive relative to semiconductors, although recent relative gains have made the risk-reward less compelling than a few weeks ago; fourth, the market may gradually shift toward high-quality earnings leadership, with high gross margins, high sales stability, and improving cash conversion worth watching; fifth, AI data center construction is facing local resistance and power bottlenecks, but this is more likely to lead to conditional construction, delays, and changes in cost allocation rather than a nationwide reversal.

Analysis framework

The report combines earnings revision breadth, factor performance, sector relative returns, valuation and cash-conversion indicators, semiconductor-versus-silver-stock price analogies, macro inflation and Fed expectations, and AI data center policy risks for a multidimensional assessment. The strategy conclusion is not based on a single index level, but instead explains changing market leadership through sector rotation, earnings quality, capex discipline, and policy constraints.

Methodology notes

• Factor researchEarnings revision breadth

  By observing the breadth of upward versus downward earnings forecast revisions across sectors or factors, one can judge whether earnings momentum and market leadership are broadening.

  The report focuses on earnings revision breadth across the S&P 500, semiconductors, transportation, high gross margin, and sales stability dimensions to show cooling semiconductor momentum and improving transportation and quality factors.

• Relative performance analysisEqual-weight index versus cap-weighted index

  When an equal-weight index outperforms a cap-weighted index, it usually means the market’s rise no longer depends only on a handful of large-cap stocks and breadth is improving.

  The report notes that the equal-weight S&P 500 continues to outperform the cap-weighted S&P 500, which is one piece of evidence that the breadth-broadening thesis continues to play out.

• Price analogySemiconductors versus silver stocks analogy

  Use historical or cross-asset price-path analogies to judge whether a short-term pullback has completed.

  The report believes the price action in semiconductors still tracks the silver-stock analogy fairly closely, which suggests there may still be about 15% downside before a short-term low is in place.

• Thematic and policy riskAI data center local resistance analysis

  Incorporate local construction bans, permitting pauses, and energy and water constraints into assessments of AI capex and related equity impacts.

  The report believes local opposition is more likely to delay data center projects, attach conditions, or require community compensation, rather than completely block US AI infrastructure construction.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• S&P 500

  Core index under assessment

  Strengths

  The overall quality of US large-cap stocks is relatively high, the year-end target of 8000 is still viewed as achievable, and the index may continue to attract capital among global assets.

  Weaknesses

  The cap-weighted index is being dragged by corrections in prior leaders and has already been consolidating over the past two months.

  Comparison

  The equal-weight S&P 500 is outperforming the cap-weighted S&P 500, reflecting improving market breadth.

  Risks

  Momentum deleveraging, liquidity shortages, escalation in Middle East conflict, or worsening risk appetite could push the index into further consolidation toward 7000.

• Semiconductors

  A core beneficiary of the earlier AI capex cycle, but relatively cautious in the short term

  Strengths

  The AI capex cycle is not over, and long-term structural demand remains intact.

  Weaknesses

  Earnings revision breadth has fallen from extreme highs, price volatility is showing commodity-like characteristics, and positioning and leverage are concentrated.

  Comparison

  The report prefers hyperscalers over semiconductors; the semiconductor-versus-silver-stock analogy suggests there may still be short-term downside.

  Risks

  If the correction deepens, it could trigger broader momentum deleveraging and a decline in risk appetite.

• Hyperscalers

  A preferred positioning direction within the AI chain relative to semiconductors

  Strengths

  Core businesses are resilient, they have participation and leadership potential in the AI agent application layer, and there is room for cost-efficiency improvement.

  Weaknesses

  They have already outperformed semiconductors by nearly 30% over the past three weeks, making short-term risk-reward less attractive than before.

  Comparison

  Relative to semiconductors, hyperscalers reflected concerns about capex discipline and peaking capex growth earlier.

  Risks

  If the market continues to punish high capex-to-sales ratios, or if credit and CDS spreads continue to widen, valuations may remain under pressure.

• Consumer discretionary

  One of the favored sectors in market breadth broadening

  Strengths

  Strong relative performance versus the S&P 500 over the past two months, with improving earnings revisions.

  Weaknesses

  Still affected by the consumer cycle, interest rates, and fluctuations in macro demand.

  Comparison

  Compared with semiconductors, this sector is seen as a breadth beneficiary where strong earnings revisions are not yet fully priced in.

  Risks

  If risk appetite weakens or consumer data deteriorates, relative performance may retrace.

• Transportation

  An important beneficiary of market breadth broadening and cyclical improvement

  Strengths

  Transportation earnings revision breadth is one of the strongest since 2021 at about 50%, and it has a strong correlation with the ISM manufacturing survey.

  Weaknesses

  The sector is sensitive to the economic cycle, oil prices, and trade activity.

  Comparison

  Relative to the S&P 500 and other cyclical sectors, transportation is viewed by the report as a clearer area of earnings revision improvement.

  Risks

  If the ISM fails to catch up toward about 60 or oil prices rebound, the earnings revision thesis would be challenged.

• AI data center infrastructure

  A cross-theme between AI capex and policy risk

  Strengths

  Long-term AI competition requires physical infrastructure, and the probability of comprehensive obstruction at the federal level is considered low.

  Weaknesses

  Local construction bans, permitting pauses, and pressure on power and water resources are delaying or canceling projects.

  Comparison

  Compared with the pure AI training capex beneficiary chain, assets tied to on-site generation, grid support, water efficiency, and critical infrastructure characteristics may be more defensive.

  Risks

  If state-level or federal restrictions become permanent and spread, the 2026 AI capex estimate of $877 billion may prove too high.

• SEI.N、INIO.O、BE

  Potential beneficiaries of on-site generation for data centers and power bottlenecks

  Strengths

  The report believes migration toward on-site power generation by data centers may benefit these names, all of which are marked OW.

  Weaknesses

  Affected by project timing, power equipment delivery, policy approvals, and the capex cycle.

  Comparison

  Compared with hyperscale training data centers that are more affected by local resistance, power-solution providers may benefit from demand to relieve bottlenecks.

  Risks

  If data center construction slows materially or power shortages ease, related demand elasticity may decline.

• EQIX.O、DLR.N

  Publicly traded data center REITs

  Strengths

  The report believes these colocation data center REITs are smaller in scale than hyperscale AI training data centers and are viewed as critical infrastructure, making them relatively insulated from political resistance.

  Weaknesses

  They may still be affected by power costs, interest rates, and real estate valuations.

  Comparison

  EQIX is marked OW and DLR is marked EW; compared with hyperscale AI training data centers, they have lower political risk exposure.

  Risks

  If power costs continue to rise or local policies broaden to a wider range of data center types, their defensive characteristics may weaken.

Key data

• Consumer discretionary and transportation relative performanceEach outperformed the S&P 500 by about 12% over the past two monthsUsed to support the view of broadening market breadth and improving cyclical sectors.
• Median-stock earnings growthMid-teens growthThe report says this is the most notable acceleration in median-stock earnings growth since the post-pandemic recovery began.
• Share of companies seeing AI adoption benefits25% of S&P 500 companies are seeing quantifiable benefits from AI adoption, versus 14% a year agoShows that the AI adoption tailwind is spreading to more companies.
• Potential short-term downside in semiconductorsAbout 15%Based on the semiconductor-versus-silver-stock price analogy; the report believes further adjustment may still occur before a tradable rebound.
• S&P 500 technical support and year-end targetTechnical support around 7000; year-end target 8000If the momentum pullback spills over or Middle East conflict escalates, the index may consolidate further toward 7000, but the report still believes the 8000 year-end target is achievable.
• 2Q EPS and sales expectations2Q EPS up about 20% YoY, sales up about 10% YoYThe report believes a mid-to-high single-digit beat rate is achievable, though the expectation hurdle is slightly higher this quarter.
• S&P 500 earnings revision breadth+19%There is a seasonal pause entering earnings season, but the historical level remains strong.
• Mag 7 and S&P 493 earnings growthExpected 2026 growth of 38% for Mag 7 and 16% for the S&P 493The report also notes early signs of upward revisions in the S&P 493.
• AI data center projects canceled or delayedAbout $156 billion in 2025 and about $130 billion in 1Q 2026, totaling about $286 billionLocal resistance and policy pauses may affect the pace at which AI capex is realized.
• 2026 AI capex estimate$877 billionIf local policies become permanent, spread, or rise to the federal level, this estimate faces downside risk.
• Potential power shortfallAbout 38GW by 2028The report believes this may drive greater adoption of on-site power generation by data centers.
• Medium-term electricity price inflationUS electricity CPI may stabilize at 4% to 5% YoY in the medium termData center demand may bring more regionalized and stickier electricity inflation shocks.

Impact & implications

From an investment standpoint, the report suggests shifting attention away from simply chasing semiconductor momentum and toward sectors and factors where earnings revisions are underappreciated, quality is improving, and breadth broadening is supportive. Consumer, transportation, high gross margin, high sales stability, and improving cash conversion companies are more worthy of attention; hyperscalers still look better than semiconductors, though the short-term relative trade is no longer as attractive as before. The AI data center theme is not broken, but policy, power, water, and community resistance will change the beneficiary chain, potentially helping on-site generation, grid support, water efficiency, and some data center infrastructure companies, while constraining the pace at which capex is realized.

Risks

• A momentum-trade pullback could evolve into broader deleveraging, leading to weaker overall risk appetite.
• Liquidity is only “ample” rather than “excessive”; against a backdrop of high equity and debt issuance and capex consuming funds, liquidity shortages could amplify market volatility.
• If the semiconductor pullback spills over into other sectors, the S&P 500 could consolidate further toward 7000.
• An escalation in Middle East conflict or an unexpected rebound in oil prices could undermine the support thesis of falling oil prices and a Fed on hold.
• If local opposition, state-level permitting pauses, or federal restrictions on AI data centers expand, AI capex could come in below expectations.
• Data center power demand could create regional and sticky electricity inflation while increasing the burden on consumers and political pressure.
• Earnings expectations have already been revised up this quarter, setting a high hurdle, and individual stocks may see greater dispersion during earnings season.

What to watch

• Whether the equal-weight S&P 500 continues to outperform the cap-weighted S&P 500.
• Whether semiconductor earnings revision breadth continues to decline from high levels, and whether prices approach a tradable low.
• Whether earnings revisions in consumer, transportation, high gross margin, and high sales stability factors translate into sustained relative returns.
• Whether the S&P 500 can hold technical support around 7000 and resume progress toward the 8000 target before year-end.
• The EPS and sales beat rates, guidance revisions, and individual stock price reactions during the 2Q earnings season.
• Whether S&P 493 earnings expectations continue to be revised up, confirming whether earnings growth is truly broadening beyond the Mag 7.
• Progress of state-level AI data center construction bans and permitting-pause proposals, and whether they rise to the federal level.
• Regional changes in data center power shortages, on-site generation adoption, grid interconnection wait times, and electricity price inflation.
• Whether the Fed remains on hold and whether core CPI continues to support a moderate inflation view.