Morgan Stanley shares a 3-part playbook for investing in AI after a Democratic blue wave

AI stocks are back in favor after last week’s plunge, and Morgan Stanley says it sees “multiple buying opportunities” for investors following last week’s midterms.

The blue wave election outcome spooked AI bulls, who worried that Democrats’ control of Congress and governorships in states like Texas would significantly slow the data center buildout. Chip stocks, neoclouds, and hyperscalers sold off hard on Thursday, with the Nasdaq 100 seeing its worst day since April 2025.

But in a client note on Monday, Morgan Stanley said the pullback was too extreme and argued that a potentially slower pace of the buildout as a result of the election would elongate the AI capex cycle and help smooth out supply chain hiccups.

“We believe the market’s reaction to the midterms is overdone,” wrote Stephen Byrd, an equity analyst, in the note. “Over the past week, the market has undergone an earthquake event, with significant uncertainty around the impact of the midterms on the data center build-out, the trajectory of the cycle, and implications for global stocks.”

“We are recommending a selective ‘Buy the Drop’ strategy,” Byrd added.

The bank broke down its strategy into three buckets: hyperscalers, data center and supply chain stocks, and software enablers and AI adopters.

Let’s unpack each of them, and how Morgan Stanley says to capitalize on each opportunity.

1. Hyperscalers

In this realm, the bank said it puts an emphasis on firms with scale, access to capital, and those able to capitalize on advances they make. In other words, the bigger the better.

Hyperscalers that Morgan Stanley’s analysts rate overweight include Microsoft, Amazon, Meta, Alphabet, and SpaceX.

“In a world with multiple constraints on the growth in AI infrastructure, we believe the largest, most sophisticated AI players are well positioned to gain share and grow margin,” Byrd wrote.

2. Data center and supply chain stocks

This is the AI infrastructure trade — all the picks and shovels involved in the data center buildout. With a potential buildout slowdown ahead, the bank urged selectivity in this space, and shared stock picks for each part of the supply chain.

To identify opportunities, Morgan Stanley looked at firms with high current profit margins and low valuations relative to their past levels.

They include:

US powered shell providers (the exterior shell of a data center): Terawulf, Riot Platforms, Hut 8, and Applied Digital are all “less exposed” to regulatory risks in Texas.

Behind-the-meter power generation companies: Bloom Energy, Solaris Energy, Liberty Energy, Vistra, Talen Energy, Constellation Energy, and BorgWarner are all more immune to slowing data center growth.

Energy: Williams Companies, Clearway Energy, HA Sustainable Infrastructure, Ormat Technologies, and Fervo Energy.

Semiconductor and hardware firms: Nvidia, Broadcom, Taiwan Semiconductor, Seagate Technology, Western Digital, Lumentum, Coherent, Arista Networks, and Keysight Technologies.

3. Software enablers and AI adopters

Morgan Stanley said that every technology cycle in the past has seen outperformance first by semiconductor firms, then infrastructure, and then software enablers and adopters.

The bank listed stock picks for each the software enabler and AI adopters categories. We’ve listed below the US stocks from each that have the highest upside to Morgan Stanley’s price target as of Monday morning, which are also rated “Overweight” by the bank’s analysts.

Upsides to price targets are shown in parentheses.

Software enablers: Snowflake (74.4%), Datadog (54.6%), ServiceNow (53.6%), Cloudflare (51.3%), Palantir (50.3%)

AI adopters: Devon Energy (54.7%), Grindr (48%), GXO Logistics (41%), Citigroup (38%), Blackstone (38%), Citizens Financial Group (38%)