Wall Street is becoming increasingly selective about where it expects the next stock market gains to come from.
As we look ahead to 2026, Morgan Stanley makes it clear that AI chips remain the most critical part of the tech space, but with a caveat.
The firm warns investors to avoid expecting straight-line growth following several years of outsized growth.
Demand for computing power is growing at an impeccable pace, keeping semiconductors at the core of the story for a third consecutive year.
For perspective, the S&P 500 posted total returns of a whopping 26.3% in 2023 (according to Chevy Chase Trust), 25% in 2024, and over 16% so far in 2025 (roughly an 86% cumulative gain since 2023), reported Barron’s.
Moreover, nearly one-third of the S&P 500 is dominated by the “Magnificent Seven,” with some estimates such as placing this figure as high as 37% as of October this year, according to Forbes.
However, at the same time, Morgan Stanley is pushing back on the more delusional forecasts that assume AI spending will continue at its breakneck pace without interruption. Hence, the firm argues, the future still looks strong, just choppy.
Consequently, Morgan Stanley is sticking with a group of familiar chip leaders, highlighting areas where it believes the market’s expectations remain mostly mispriced heading into 2026.
Morgan Stanley outlined its tech stocks to buy heading into 2026.Photo by ANGELA WEISS on Getty Images
For Morgan Stanley, the AI trade is entering a more disciplined phase.
After several years of seeing stupendous gains, analysts point to uneven growth, consolidation periods, and occasional slowdowns.
For perspective, Morgan Stanley’s latest call pegs the S&P 500 at 7,800 by the close of 2026, Bloomberg reported, and the logic has a lot more to do with “earnings grind” than bubble math.
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The bank expects solid bottom-line expansion, led by AI-driven gains, without requiring valuations to skyrocket.
From Friday’s 6,834.50 close, that target implies a sizeable 14% upside, according to CNBC.
Hence, Morgan Stanley is focusing on businesses with clear earnings visibility, durable moats, and realistic valuations.
Morgan Stanley’s chip playbook names Nvidia (NVDA) and Broadcom (AVGO) as its top processor names, even though discussions about custom ASICs continue to gain momentum.
The firm’s analysts view Nvidia as the offering with the “best return on investment” as the robust Vera Rubin platform ramps up in the second half of 2026.
Vera Rubin is “on track to ramp” with it being designed to deliver a massive performance bump compared to Blackwell.
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According to Nvidia, the Vera Rubin platform is more than 3.3 times faster than Blackwell Ultra and offers up to 7 times more AI horsepower in its top server setup.
Moreover, Broadcom is the cleanest way to play the custom silicon and networking side of AI infrastructure. The growing ASIC expectations are a significant reason why the numbers continue to move higher.
Also, for investors seeking data-center exposure without incurring mega-cap tech prices, Astera Labs (ALAB) remains a relatively smaller name, but one that’s linked to connectivity within hyperscale AI buildouts.
Morgan Stanley’s AI outlook isn’t just about flashy processors.
It sees powerful support building across memory, equipment, and select analog chips, which are typically areas that matter a lot more once things scale up.
Micron remains the top memory pick, led by tight supply and robust pricing power, as data centers continue to absorb massive amounts of high-bandwidth memory.
Demand remains healthy enough to keep conditions favorable, even if growth isn’t as perfectly smooth as forecasted.
On the equipment side of things, Morgan Stanley remains optimistic about Applied Materials and Taiwan Semiconductor, both of which are involved in the production of high-performance chips and capacity expansion linked to AI workloads.
Analog chips are also improving at a much slower rate, as Morgan Stanley sees a significant opportunity there, highlighting NXP Semiconductors for its mix of growth and valuation, while Analog Devices remains attractive fundamentally.
