Morgan Stanley signaled on Tuesday that technology shares could face further downside, noting that rising oil prices have the potential to exacerbate an already difficult macroeconomic backdrop.
The bank said the path forward depends on three central variables. Analyst Shawn Kim highlighted that the Philadelphia Semiconductor Index has undergone a 20% de-rating since the outset of the Middle East conflict and now trades at roughly 20x forward earnings.
Kim added that the index currently sits only about 8% above its April 2025 lows, a level the firm characterizes as consistent with mid-cycle corrections. That level of multiple compression has already contributed to a notable retracement in semiconductor market values.
At the same time, Morgan Stanley pointed out that global technology earnings have increased by 6% since the Iran conflict began, indicating that consensus profit estimates have not yet fallen in line with how stocks have traded. "Stocks are trading as if numbers are going to be cut," Kim wrote.
The bank laid out the specific scenario that would heighten downside risk: "The risk of further downside is if the market assumes: 1) this conflict is extended; 2) oil stays elevated well above $100; and 3) earnings are revised lower." Each of those three developments, individually or together, would change the risk calculus for the sector.
Morgan Stanley drew on historical episodes to frame the potential magnitude of the threat. The note observed that past oil spikes around 2008 and 2022 coincided with roughly 30% drawdowns in the SOX index and substantial multiple compression, contrasting with the current decline of around 12%.
Within the broader technology landscape, the firm said it continues to favor areas with stronger pricing power and capex tailwinds. "We continue to favor higher pricing power in DDR5 DRAM, HDD, NAND flash and SPE capex benefits vs. downstream hardware and a consumer that is facing margin pressure," Kim concluded.
Context and implications
The note frames a conditional view: while earnings to date have held up, market valuations in semiconductors have already fallen substantially. The bank is effectively warning that if geopolitical tensions persist and oil remains elevated, valuation and earnings dynamics could both turn against the sector.