Key insights
- Morgan Stanley notes that rising yields have pressured AI momentum stocks, but strong earnings and moderate valuations limit downside risk. They suggest the recent selloff was driven by multiple compression rather than deteriorating fundamentals. A prolonged drawdown would require significantly higher yields or a weakening of the AI earnings thesis. They recommend Earnings Window Momentum strategy to reduce dependence on crowded AI winners.
Investing.com -- Morgan Stanley analysts said higher bond yields have pressured AI-led momentum stocks, but resilient earnings, contained volatility and moderate valuations support continued selective exposure to the factor.
The firm noted that momentum stocks are not excessively expensive relative to their own history, with valuations near the 49th percentile of their historical range. This suggests the recent selloff was unlikely driven by extreme valuation levels.
Earnings data shows the share of US constituents in Morgan Stanley's AI thematic portfolio beating consensus earnings per share remains high and continues to exceed the broader MSCI U.S. universe. The firm said this indicates recent weakness was driven primarily by rates-driven multiple compression and positioning pressure rather than deteriorating earnings delivery.
The lack of valuation excess and continued earnings support reduce the risk of an extended momentum correction, according to Morgan Stanley. A more prolonged drawdown would likely require either a material further rise in yields or a weakening of the AI earnings thesis, the firm said.
Morgan Stanley's Earnings Window Momentum strategy exhibited a much shallower drawdown than traditional 12-month Price Momentum during the recent selloff. For investors seeking to retain momentum exposure while reducing dependence on crowded AI winners, Earnings Window Momentum remains a useful implementation, the firm said.