Morgan Stanley continues to believe that mega-cap tech stocks will march higher next year, even though hyperscalers are poised to gobble up over $1 trillion in debt.
In a new episode of the Thoughts on the Market podcast, Serena Tang, chief global cross-asset strategist at Morgan Stanley, says those comparing the AI boom to the 1990s bubble are well off track, noting that today’s companies are stronger with higher margins and better cash generation.
“There are some very important differences from that time period from valuations back then. First of all, I think companies in major equity indices are of higher quality than in the past. They operate more efficiently, they deliver strong profitability, and in general, pretty solid free cash flow. I think we also need to consider how technology now represents a larger share of the index, which has helped push overall net margins to about 14% compared to 8% during that 1990s valuation bubble. And when margins are higher, I think paying a premium for stocks is more justified.
In other words, I think multiples in the US right now look more reasonable after adjusting for profit margins and changes in index composition.”
In addition to stronger fundamentals, Tang highlights that the macro backdrop favors AI bulls.
“The policy backdrop is unusually favorable. Right. You have economists expecting the Fed to continue easing rates into next year. We have the One Big Beautiful Bill Act that could lower corporate taxes and deregulation continues to be a priority in the US. And I think this combination of monetary easing, fiscal stimulus, deregulation, that combination really occurs outside of a recession.
And I think this creates an environment that supports valuation, which is, by the way, why we recommend an overweight position in US equities, even if absolute and relative valuation look elevated.”
But zooming out, Tang notes that the hyperscalers are now looking beyond their massive cash stockpiles to continue funding the AI boom.
“We really can’t get away from AI as a topic. And I think this will continue because AI-related CapEx (capital expenditure) is a long-term trend, with much of the CapEx still really ahead… This really means that we expect nearly another $3 trillion of data-center-related CapEx from here to 2028. While half of the spend will come from operating cash flows of hyperscalers, it still leaves a financing gap of around $1.5 trillion, which needs to be sourced through various credit channels.”
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