Following substantial sell-offs in U.S. equities last week, there has been a rebound early this week, with the S&P 500 index climbing 2.1% in just the first two days. Tech stocks have also 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, according to strategists at UBS.
However, UBS remains optimistic, stating that fresh numbers and company guidance this week are likely to further solidify their positive view on the AI theme and the global tech sector overall. Strategists suggest that despite recent volatility, AI fundamentals remain intact, with 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,” noted strategists led by Mark Haefele.
UBS has also observed increasing signs of AI monetization. They cite German software company SAP’s reported 25% growth in cloud revenue fueled by AI demand as an example. Additionally, a recent survey by the US Census Bureau showed that AI adoption rose sharply in the first quarter compared to the previous quarter.
UBS emphasizes 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.”
In conclusion, UBS maintains a positive outlook on the AI trend, preferring big tech companies given their advantageous market positions. They also continue to favor the semiconductors and software segments.
