Morgan Stanley says markets are unprepared for AI disruptions in the next few months. Here are its 3 top predictions.
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- Morgan Stanley predicts AI models will self-improve quickly, further disrupting markets by mid-2026.
- AI executives have recently warned of faster-than-expected growth in LLM capabilities.
- Morgan Stanley advises investing in AI infrastructure and assets that AI can't replace.
If you thought AI disruption had caught investors off guard so far this year, wait until this spring.
That's the message Morgan Stanley shared with clients in a note on Tuesday, saying that AI models will soon reach a critical point of self-improvement, leading to an exponential increase in what they can accomplish.
It was perhaps the most urgent of the 10 AI-related predictions the bank made in the note following its recent tech conference.
"The market is not prepared for the non-linear increase in LLM capabilities, which, in our view, will become evident in April-June," the bank said, using the acronym for large language models, which power AI bots like ChatGPT.
The bank noted that several AI executives at its recent TMT conference warned that near-term LLM improvements would surprise investors, and also pointed to recent statements from AI industry titans like Sam Altman and Jimmy Ba alluding to faster-than-expected growth in AI technology.
"The world is not prepared…. [W]e are going to have extremely capable models soon. It's going to be a faster takeoff than I originally thought," Altman said at the India AI Impact Summit in February.
If the bank's thesis plays out and aligns with predictions coming from major AI players, expect price deflation for services in industries that are vulnerable to AI disruption, the bank said, as well as reduced staffing at these firms.
Earlier this year, industries such as wealth management, insurance, shipping, gaming, property management, and software saw stock prices decline amid fears about the future impact of AI.
In terms of how to position for the coming disruption, Morgan Stanley said to lean into AI infrastructure companies.
Examples of funds that offer broad exposure to AI infrastructure names include the Global X Data Center & Digital Infrastructure (DTCR) and the Defiance AI & Power Infrastructure ETF (AIPO).
Other assets whose value should get a relative boost are things that AI cannot replace, MS said. Those include energy, metals, communication infrastructure, proprietary data firms, and luxury resorts.
Here are three of the firm's other top AI predictions.
Demand for computing power is not fully priced in
Morgan Stanley said that demand for computing power will only increase as the importance of AI grows.
That means semiconductor chip firms, companies that supply chip manufacturers, and data center developers are poised to benefit even more, the bank said.
"As Jensen said at our conference: demand for compute is 'higher than incredibly high' as AMZN Web Services ramps' like mad' in addition to the other US LLM labs needing 'a few million' net new GPUs," the note said, referring to Nvidia CEO Jensen Huang.
Funds that offer exposure to these trades include the iShares Semiconductor ETF (SOXX) and the Data Center & Digital Infrastructure ETF (DTCR).
The US government's backing of AI will create investment opportunities
"We believe investors under-appreciate the magnitude of upcoming US government support in two areas: spending on a wide range of critical materials (rare earths, metals, nuclear fuel) and spending on six categories of military technologies," the analysts said.
The bank recommended owning a broad range of relevant stocks, since it's difficult to predict which firms will benefit most from government spending. Examples of funds that offer expsoure to these themes include the Sprott Critical Materials ETF (SETM) and the Global X Defense Tech ETF (SHLD).
China will fall behind the US on AI
Given the advances Morgan Stanley expects US AI models to make imminently, it predicts China will fall behind in the AI race.
That will lead the country to ask the US for more technology sharing, the bank said.
"We believe China will push the Trump administration to grant far greater levels of AI technology transfer and cutting edge AI chip sales, and given China's rare earths dominance, we believe it is likely that the Trump administration will grant at least a portion of such requests," the note said.