Morgan Stanley's Dan Skelly on why now is the time to diversify

Summary

Dan Skelly of Morgan Stanley Wealth Management discusses the market rotation out of crowded AI winners into laggard areas. He highlights emerging fundamental risks in AI, including pricing wars and Microsoft's shift to lower-cost models, and advocates diversification into regional banks, health care, and short-cycle cyclicals. The macro backdrop remains resilient with an 'unremarkable' economy grinding forward.

• Sharp reversal sees chip stocks buckle and rotation into software and laggards.
• AI trade faces crowding and fundamental risks: pricing wars, declining GPU rental prices, Microsoft pivot to cheaper models.
• Mag-7 area likely needs to roll over for the rest of the market to work.
• Rotation into regional banks, health care, and short-cycle industrials/cyclicals favored for diversification.
• Perception of Iran de-escalation sticking supports cyclicals.
• Economy described as 'unremarkable,' resistant to inflation and policy shocks.
• Historical semi cycle analog suggests AI hardware may pause but has multi-year runway.
• Fed outlook unchanged; incremental cuts expected but being priced out.