Morgan Stanley strategists said that an uptick in bond yields has exerted pressure on AI-led momentum equities, but they see reasons to maintain measured exposure to the theme. Key supporting elements include resilient corporate earnings among the AI cohort, contained market volatility and valuations that are not extreme by historical standards.
The analysts pointed out that momentum stocks remain near the 49th percentile of their own historical valuation range, indicating they are not trading at unusually high premiums relative to their past. That level suggests the recent decline was unlikely caused by extreme overvaluation.
On the earnings front, Morgan Stanley reported that a high share of the U.S. securities in its AI thematic portfolio continued to beat consensus earnings per share expectations, and that this beat rate remains above that of the broader MSCI U.S. universe. The firm interpreted that pattern as evidence the recent weakness in prices reflected rates-induced multiple compression and pressures from investor positioning rather than any widespread weakening in earnings performance.
According to the note, the lack of valuation excess combined with ongoing earnings support reduces the likelihood of a prolonged momentum correction. The analysts said that a deeper and more sustained drawdown would probably require either a material additional rise in yields or a deterioration in the AI earnings thesis.
Morgan Stanley also highlighted the performance of its Earnings Window Momentum strategy during the recent selloff. That approach recorded a significantly shallower decline compared with a standard 12-month Price Momentum strategy, the firm said. For investors who want to preserve momentum exposure while lowering concentration risk in heavily held AI winners, Earnings Window Momentum was offered as a practical implementation option.
In sum, the firm advises selective exposure to AI-led momentum stocks given the present mix of supportive earnings and moderate valuations, while flagging yields and any potential weakening of AI earnings as the principal risks to that stance.
Impacted sectors: Technology (AI-focused equities), Fixed income (yields), and broader equity markets influenced by momentum strategies.