MS 'surprised' AI stocks are not pricing in potential Chinese invasion of Taiwan

Morgan Stanley's US strategists highlighted a potential risk factor for chip stocks that have been riding high on the artificial intelligence (AI) wave. The strategist pointed out that these stocks might need to account for a risk premium due to the possibility of a Chinese invasion of Taiwan.

The strategists expressed surprise that, despite the geopolitical risks, there has been no risk premium incorporated into the valuation of these AI-driven semiconductor stocks.

"We don’t think it’s a high risk, but it is a risk. There should be some risk premium built into that," the broker's strategists said during a Bloomberg TV interview.

Moreover, the strategist remarked that semiconductor companies have yet to fully realize the benefits of AI in their financial results. Despite the current enthusiasm for AI, the strategist suggested that many companies have been overvalued because of limited investment opportunities.

"Because there has been a dearth of opportunities," the strategist said, explaining why some stocks might be overpriced.

"AI is everywhere but in the numbers."

The strategist also noted that for the past year and a half, investors have been eager to jump on any promising trend due to the overall lackluster growth in earnings. This eagerness is seen as a reason for the heightened interest in AI-related stocks.

Today's comments come just a day after Morgan Stanley raised its price target on the S&P 500 to 5,400 from the prior 4,500.

Morgan Stanley strategists also said that they still can't rule out a recession in the United States.