Morgan Stanley’s chief US equity strategist Mike Wilson has declared that AI stocks have become “overcooked,” signaling a significant shift in investor sentiment toward artificial intelligence investments. In a candid interview with Bloomberg Surveillance, Wilson revealed that the “AI dream” long held by investors has lost some of its luster, with semiconductor stocks experiencing a notable downturn.
The semiconductor sector has witnessed a nearly 7% decline since Nvidia’s earnings report failed to meet investors’ sky-high expectations. Nvidia, the industry’s flagship company and AI chip leader, has been hit particularly hard, with its share price plummeting approximately 13% in the aftermath. Wilson emphasizes that he gauges AI’s performance not just by examining top players like Nvidia, but by analyzing the semiconductor industry as a whole, which has seen widespread declines across the board.
However, Wilson clarifies that this downturn doesn’t necessarily spell doom for the AI industry. Instead, it reflects Morgan Stanley’s more measured perspective that AI will deliver benefits and returns over the longer term rather than immediately. “We’re not believers that this is going to change productivity materially in the short-term. That’s a long term story,” Wilson explained, tempering expectations for quick returns on AI investments.
With the AI rally fading, investors are now searching for the next big investment theme. In the interim, Wilson recommends that investors take shelter in “quality defensive stocks” across sectors like utilities, staples, and healthcare. These sectors are positioned to perform well amid a slowing labor market, which Wilson characterizes as consistent with a late-cycle economic backdrop.
Morgan Stanley’s investment strategy has shifted accordingly. Last month, Wilson’s team added three new quality defensive stocks to its “Fresh Money Buy List,” which now comprises nine stocks total. The firm’s guidance suggests that until a new growth theme emerges—whether positive or negative—investors should “hunker down into defensive, high-quality assets.”
This strategic pivot represents a significant moment in the AI investment narrative, as one of Wall Street’s most prominent voices acknowledges that the sector’s explosive growth phase may be cooling, at least temporarily.
Key Quotes
A lot of those stocks have really come off. And that makes sense to me. We just got overcooked on the whole AI theme.
Mike Wilson, Morgan Stanley’s chief US equity strategist, explained the recent decline in semiconductor and AI stocks, suggesting that investor enthusiasm had exceeded reasonable valuations and expectations for the sector.
We’re not believers that this is going to change productivity materially in the short-term. That’s a long term story.
Wilson tempered expectations about AI’s immediate economic impact, positioning Morgan Stanley’s view that meaningful returns from AI investments will take years rather than months to materialize.
With that theme now gone, the market is looking for a new theme. On the growth side, there isn’t one, so what it does is it hunkers down into defensive, high-quality assets until we get the next thing.
Wilson described the current market dynamics following the AI rally’s fade, explaining why investors are pivoting to defensive stocks in utilities, healthcare, and consumer staples while waiting for the next growth catalyst.
Our Take
Wilson’s assessment marks a sobering moment of truth for the AI sector, but it’s not necessarily bearish—it’s realistic. The semiconductor industry’s 7% decline and Nvidia’s 13% drop reflect a market correction that was arguably overdue given the astronomical valuations driven by AI hype. What’s particularly noteworthy is Wilson’s distinction between short-term productivity gains and long-term transformation. This perspective aligns with historical technology adoption curves, where revolutionary technologies take years to fully integrate into business processes and deliver measurable productivity improvements. The shift toward defensive stocks doesn’t mean AI is dead; rather, it suggests we’re entering a more mature phase where investors demand proof of concept and sustainable business models rather than accepting promises of future disruption. This recalibration could ultimately strengthen the AI industry by forcing companies to focus on practical applications with clear ROI rather than chasing speculative moonshots.
Why This Matters
This analysis from Morgan Stanley represents a critical inflection point in the AI investment narrative that has dominated markets for the past two years. The acknowledgment that AI stocks are “overcooked” by a major Wall Street strategist signals a potential end to the euphoric phase of AI investing, where valuations soared based on future promises rather than current returns.
The implications extend beyond just stock prices. Wilson’s emphasis that AI won’t materially change productivity in the short-term challenges the prevailing narrative that has driven billions in investment. This reality check could lead to more measured expectations across the tech industry, potentially affecting funding for AI startups, corporate AI budgets, and strategic planning timelines.
For businesses heavily invested in AI infrastructure and development, this signals the importance of demonstrating tangible ROI rather than relying on future potential. The shift toward defensive stocks also reflects broader economic concerns about a slowing labor market and late-cycle dynamics, suggesting that AI’s promise alone isn’t enough to sustain investor confidence amid macroeconomic headwinds. This recalibration could ultimately prove healthy for the AI industry, separating sustainable innovations from speculative hype.
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