Tariff breakthrough and consumer divide engulf the stock market. Morgan Stanley reveals the secret to gaining "alpha": AI, semiconductor equipment and essential consumption.

Recently, Wall Street financial giant Morgan Stanley released a research report, stating that based on in-depth interviews with industry leaders, they have identified three core investment trends in the stock market currently and in the next 12 months. They have also summarized three major long-term investment themes that are expected to outperform the market - leaders in the AI computing power industry chain closely related to artificial intelligence, software giants benefiting from the AI wave, semiconductor equipment themes benefiting from a series of favorable policies from the Trump administration, and essential consumer goods themes benefiting from the increasing division in the consumption chain. Morgan Stanley stated that the first core trend is the continuous focus on AI (artificial intelligence) globally, which has been a strong investment trend since 2023. This is followed by high-end manufacturing companies with resilient performance in the global trade war and benefiting from the "Build Back Better" Act led by the Trump administration, "reshoring of manufacturing to the US", and "supply chain relocation to the US" policies. Lastly, companies leading in essential consumer goods that benefit from the increasing stratification of global consumption trends. Therefore, according to Morgan Stanley's analysts, investment themes closely related to AI, semiconductor equipment giants benefiting from the "Build Back Better" Act and "reshoring of manufacturing to the US", and diverse essential consumer goods giants achieving counter-trend sales growth in the consumer market are expected to be the strongest investment themes for investors to continuously gain "excess alpha returns" in the global stock market over the next year. The so-called "alpha returns" are defined as returns on investment that far exceed "beta returns" - that is, "alpha returns" accurately refer to returns far beyond those achieved by tracking benchmark stock indices (such as the Dow Jones Industrial Average and the S&P 500 Index). Returns achieved by tracking benchmark indices are also known as "beta returns" (Beta). Morgan Stanley's analysis team emphasized that the logic behind the three core investment themes is profit certainty and structural growth trends. They focus on sectors like essential consumer goods that have stable cash flows and defensive attributes to hedge against risks of economic slowdown and consumption differentiation. They also actively capture structural growth factors like the AI wave and its driving effects brought by the "Build Back Better" Act. At a macro level, Morgan Stanley's analysis team mentioned that the inflation pressure easing, cost control, and extreme polarization of corporate performance guidance make the market more suitable for selecting high-quality companies with fundamental strengths and resilient growth potential in the face of headwinds, instead of just focusing on passive beta returns. AI Computing Power Industry Chain and Software Giants Benefitting from AI The global demand for AI computing power has been expanding rapidly, with the US government investing heavily in AI infrastructure projects and tech giants continuously investing in large data centers. This indicates that the "AI faith" sweeping the globe has not yet reached its peak for investors who are long-term enthusiasts of NVIDIA and the AI computing power industry chain. Betting on NVIDIA, TSMC, and Broadcom- the leaders of the AI computing power industry chain, the prices of their stocks are expected to continue to follow a bullish trend due to the "AI faith". The penetration of breakthrough AI applications like AI intelligent agents across various industries globally brings an immense demand for "AI inference end computing power", signaling a promising future for the AI computing infrastructure sector, including AI chips, HBM storage systems, enterprise-grade SSDs, and high-performance networking and power equipment. Analysts' expectations compiled by Bloomberg Intelligence show that Wall Street analysts generally expect the four tech giants - Google, Microsoft, Meta (Facebook's parent company), and Amazon - to collectively spend over $350 billion on data center expansions or new builds centered around AI computing power infrastructure, which would contribute to a nearly 50% year-over-year growth in 2024 from a strong base in 2023. Morgan Stanley's corporate research data indicates that AI-related capital expenditures for tech companies are expected to reach 28% by 2025 (up from 12% in 2023). Specific use cases are expected to see about 30% of companies implementing AI-generated code, leading to at least a 10% conversion rate uplift in advertising/customer service areas (e.g., Meta's AI+ digital advertising tools). The applications of AI are all pointing towards the rigid demand for underlying reasoning computing power in the near future. In Wall Street, including financial giants like Morgan Stanley, there is a strong optimism for leaders in the AI computing power industry chain to continue performing well in the bull market fueled by the continuous explosive growth in AI GPU demand. Another Wall Street giant, J.P. Morgan, recently stated that with new investors entering the market, widespread expansion of AI applications, and the full potential release of AI capital expenditure in the Chinese market, the AI capex could achieve a strong growth rate of at least 20% on top of the robust 50% growth rate in 2025, reaching a peak in 2026. In the eyes of Wall Street investment giants like Loop Capital and Wedbush, the global wave of investment in AI computing power hardware, centered around the AI chip industry, is far from over, and is just the beginning. Under the unprecedented "AI computing power demand storm", this AI investment wave is expected to grow to a scale of up to $2 trillion. Morgan Stanley does not favor all software stocks benefiting from the AI investment theme, but rather those that continue to benefit from the trend of AI diffusion, such as major AI application software giants like Microsoft, Oracle, and the two leaders in EDA software - Synopsys and Cadence. Morgan Stanley stated that the AI investment boom would bring about profit growth, productivity improvement, and cost reduction for companies, adding an additional $13 to $16 trillion in value to the S&P 500 index. According to Morgan Stanley's highest expectations, this would mean a whopping 30% increase in the market value of this benchmark index. Morgan Stanley's analysts predict that the accelerated proliferation of AI application software starting from 2025 will bring significant efficiency and productivity improvements to the entire industry. The emergence of AI intelligent agents, which can make decisions and actions with less supervision than generative AI systems, could potentially contribute up to approximately $490 billion in net profit value. Based on the current technological trajectory, the development of AI application software is centered around "generative AI application software" (such as DeepSeek, ChatGPT, Sora, and Claude introduced by Anthropic), as well as AI applications that transition from chatbot-style Q&A to "autonomously executing various tedious and complex tasks". The urgent need of companies to improve efficiency and reduce operational costs has been driving significant advancements in the two main categories of AI application software - generative AI applications and AI intelligent agents. The latter, AI intelligent agents, are likely to be the major trend in AI applications before 2030, signifying the evolution of artificial intelligence from an information-assistance tool to a highly intelligent productivity tool. Build Back Better Act and "Reshoring of Manufacturing to the US" In their research report, Morgan Stanley's analysis team mentioned that the "Build Back Better" Act (OBBBA Act) led by the Trump administration and passed in Congress is expected to significantly raise Free Cash Flow (FCF) expectations for US manufacturing companies over the next decade. At the same time, the favorable catalyst for US industrial and semiconductor equipment leaders is the "reshoring of manufacturing to the US" and "supply chain relocation to the US", which is a crucial direction in the transformation of the US economy. Morgan Stanley stated that under the impact of tariff policies, industrial equipment, raw materials, and semiconductor equipment sectors have the strongest pricing power, making them the core "tariff beneficiaries". The recent passage of the OBBBA Act in Congress has resulted in an average 3.2% decrease in cash tax rates for US companies, leading to approximately 35% of manufacturing companies accelerating the transfer of manufacturing capacity back to the US. Particularly, the semiconductor manufacturing industry is continuously reshoring to the US, driving a significant expansion in semiconductor equipment procurement. Furthermore, semiconductor equipment has been one of the biggest beneficiaries of the unprecedented AI wave since 2023 and is expected to continue benefiting from the AI boom in the long term. Compared to chip giants like NVIDIA, Broadcom, and TSMC that global investors are focusing on, leaders in the semiconductor equipment sector are considered "quiet winners" benefiting from the unprecedented hype wave of global corporate AI deployment. Current global demand for AI chips is very strong and expected to last until 2027. As a result, chip manufacturers like TSMC, Samsung, and Intel are expanding their production capacities extensively. Additionally, storage giants like SK Hynix and Micron are scaling up their HBM production, which requires a large number of semiconductor equipment purchases for chip manufacturing and advanced packaging. The advanced AI chips have higher logic density, more complex circuit designs, and higher requirements for power and precision of equipment, leading to greater technical demands in lithography, etching, thin-film deposition, multilayer interconnect, and thermal management, requiring customized manufacturing and testing equipment to meet these requirements. Therefore, leaders in the semiconductor equipment industry like ASML, Applied Materials, and Lam Research, have a strong hold on the "heart of chip manufacturing". In semiconductor factories, American semiconductor equipment giants Lam Research and Applied Materials are ubiquitous. Unlike ASML's focus on lithography, Lam Research and Applied Materials provide essential equipment in almost every step of chip manufacturing, covering Atomic Layer Deposition (ALD), Chemical Vapor Deposition (CVD), Physical Vapor Deposition (PVD), Rapid Thermal Processing (RTP), Chemical Mechanical Polishing (CMP), wafer etching, and ion implantation, which are the most critical steps in chip manufacturing. Applied Materials also has high-precision manufacturing equipment and customized solutions for two key advanced packaging processes - Wafer Hybrid Bonding and Silicon Through Silicon Via (TSV) - that are indispensable for TSMC's 2.5D CoWoS and more advanced 3D packaging steps. Diverging Consumer Chain Morgan Stanley highlighted in their research report that companies benefiting from the AI wave, the Build Back Better Act, and the reshoring of manufacturing to the US, with strong demand, have generally exceeded expectations in performance, while companies facing impacts like consumers cutting optional spending or rising costs have weaker prospects and guidance. The widespread divergence in performance guidance indicates that the stock market will present a situation of "some rejoice while some worry", implying that investments need to focus more on the industry itself and the differences in company fundamentals, especially in the consumer sector. In terms of strategy, Morgan Stanley analysts prefer the essential consumer goods sector and relatively avoid discretionary consumption. They point out that when consumers tighten their wallets and allocate more spending towards essential goods, revenue from daily consumer goods and food and beverage companies becomes more reliable. Conversely, companies relying on discretionary spending (such as durables and leisure consumption) may face more challenges. In addition, essential consumer goods companies are also benefiting from slowing inflation - lower material costs can help improve gross margins. These factors make essential consumer goods a defensive and profitable investment area in the current environment. Morgan Stanley also specifically noted that many companies are paying attention to the noticeable differences in health between "high-income vs. low-income" consumers. High-income groups are less affected by inflation and still have savings, allowing them to spend on non-essential items; in contrast, low-income consumers are more significantly impacted by price increases and the withdrawal of pandemic subsidies, forcing them to reduce discretionary spending and turn to cheaper alternatives. Therefore, Morgan Stanley stated that consumer demand is showing extreme differentiation, with robust growth in essential goods but continued weakness in discretionary items, leading to a divergence in consumption between high-income and low-income groups. However, both high-income and middle-low-income groups choose to prioritize the purchase of essential goods like food and daily necessities, while reducing discretionary spending, ensuring relative stability in the revenue of essential goods companies and even a slight increase in pricing.