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UBS says AI fundamentals remain intact, tech should continue to outperform


Last week’s substantial sell-offs in U.S. equities were followed by a rebound early this week, with the S&P 500 index climbing 2.1% in just the first two days. Similarly, tech stocks recovered some of their losses, with the Nasdaq rising by 2.6%.

Looking ahead, investor focus is on the upcoming Big Tech earnings report, which they will closely scrutinize to gain insights into the latest monetization and capital spending trends within the generative artificial intelligence (AI) sector. 

Should these outcomes fall short of market expectations, it could lead to renewed volatility, strategists at UBS said.

“However, we believe fresh numbers and company guidance this week are likely to further solidify our positive view on the AI theme and the global tech sector overall,” they added.

Strategists suggested that despite recent volatility, AI fundamentals remain intact, with the capital spending on AI infrastructure by big tech companies continuing to accelerate. 

This indicates that UBS’s earlier global data-center capital expenditure estimate of $300 billion in 2024 “may prove conservative,” strategists led by Mark Haefele noted.

There have been more signs of increasing AI monetization, the investment bank said. 

“German software company SAP this week reported a 25% growth in cloud revenue fueled by AI demand, pointing to a strong AI monetization trend that we expect to see more evidence of this week,” strategists wrote. 

“Separately, a recent survey across 1.2 million firms by the US Census Bureau showed that AI adoption rose sharply in the first quarter compared to the previous results from the September 2023 quarter,” they added.

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UBS said that last week’s sell-off has led global tech stocks to trade at only 22.5 times their forecasted 2025 earnings, a decrease from nearly 25 times earlier this year. 

Strategists believe that with the sector potentially exceeding its estimated 18% year-over-year earnings growth for the year, the recent 10% correction in valuations presents “an attractive entry point for investors looking for long-term opportunities.”

“So, without taking any single-company views, we stay positive on the AI trend, maintaining our preference for big tech given their advantageous market positions. We also continue to favor the semiconductors and software segments,” UBS’s team said.

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