Morgan Stanley has identified promising sectors for the remainder of the year. Chips are not among them.

Morgan Stanley has identified several sectors that, according to its strategists, could become market leaders for the remainder of the year. The bank believes investors should not count on a continued rally in semiconductor stocks, which have led the market for most of the year.

The market is now entering a new phase of the economic cycle, which creates favorable conditions for companies with high free cash flow, efficient operations, and disciplined capital expenditures, according to Morgan Stanley analysts quoted by MarketWatch.

According to the bank, this situation plays into the hands of software developers, who earlier this year were hit by a “software apocalypse” — a sell-off triggered by concerns over the impact of artificial intelligence on their business models. In addition, Morgan Stanley favors the financial sector, insurance companies, and players in the healthcare market.

The market is shifting from companies that build infrastructure for artificial intelligence to those that actually use it, MarketWatch reported. Earnings forecasts for these sectors are improving, according to Morgan Stanley strategists.

The bank's analysts view rising yields on long-term government bonds as the main risk to the market. Investors’ concerns stem not so much from the stability of public finances as from strong nominal economic growth, the situation in the oil and energy markets, and an oversupply of bonds from governments and companies, according to MarketWatch.

The S&P 500 broad-market index has risen 12% since the start of the year, the Russell 2000 small- and mid-cap index has risen 20%, and semiconductor stocks have also soared. Virtually all of them, except for the “Magnificent Seven,” have delivered double-digit returns, notes MarketWatch.

However, the only segment of the market that has cooled off recently is so-called momentum stocks, whose success is based on investors’ bets that these rapidly rising stocks will continue to climb in price, according to MarketWatch. Semiconductor stocks peaked in June 2026, the publication noted. According to Morgan Stanley, the stock performance in this sector resembles last year’s silver rally. And although one more surge can still be expected, the bank no longer considers this segment a market leader.

“We disagree with those who say that nothing has fundamentally changed in terms of market leadership and that the sell-off in momentum stocks was merely a repositioning of overleveraged portfolios. We believe that it was precisely the transition to the middle of the economic cycle that triggered the repositioning, which was then amplified by leverage,” MarketWatch quotes Morgan Stanley strategists as saying.

This article was AI-translated and verified by a human editor