Investing.com -- IT hardware stocks have rallied sharply in recent months, but Morgan Stanley warned that peak valuations and mounting cyclical risks make the sector vulnerable to negative earnings revisions in the second half of the year.

In a note to clients, analyst Erik Woodring said hardware stocks, excluding Apple, now trade at 26 times next-twelve-months price-to-earnings, which is a 10-turn premium versus the prior valuation peak, an all-time high relative to the S&P 500, and a premium to blue chips including Nvidia.

The firm noted that earnings revision breadth is near 15-year peak levels.

Despite reflecting near-term spending resilience in its above-consensus April and July quarter forecasts, Morgan Stanley believes "the market is missing 'the forest through the trees' as pull-forward, memory inflation/supply shortages, and macro create downside margin/EPS risk in 2H."

The firm flagged three specific risks, including a once-in-a-generation memory supercycle with memory up more than 600% year-on-year, widespread supply chain shortages, and an increasingly volatile macroeconomic backdrop.

Morgan Stanley maintained its cautious stance on the group, though it acknowledged the risks are more likely to crystallize in the second half than in the current earnings cycle.

Among names heading into results, the firm said Dell's setup is the most tactically positive, followed by HPE and Xerox.

Conversely, Morgan Stanley flagged HPQ and NetApp as carrying the greatest risk of margin and earnings per share guidance cuts this quarter, with both carrying Underweight ratings.