Morgan Stanley Warns AI Funds Are Rotating Out of US Mega-Caps

The generative AI boom in US equities has long been led by mega-cap technology stocks, but whether their heavy capital spending can translate into profits has become critical to sustaining valuations. Morgan Stanley said the market's focus is shifting from the scale of AI investment to the efficiency of its returns. Funds are consequently spreading into small-cap stocks, cyclical sectors and companies benefiting from AI applications.

As of July 20, 2026, Morgan Stanley warned that the rotation in US technology stocks was accelerating and AI-related funds were moving out of mega-caps. The related reports did not disclose a specific net outflow figure. The firm advised investors to focus on earnings quality, including cash flow and profit margins, and to moderately increase exposure to companies using AI applications that can produce tangible gains in revenue or productivity.