According to strategists at UBS, the strong rally in technology stocks, which has propelled the S&P 500 to record highs this year, may soon come to an end. While the index has surged 10% since the beginning of the year, much of this growth has been fueled by gains in the tech sector, particularly the S&P 500 Information Technology subgroup, which has seen a 12.5% increase.
The optimism surrounding tech stocks has been driven by expectations of multiple interest rate cuts by the Federal Reserve and ongoing investor enthusiasm for artificial intelligence. However, UBS strategists, including Andrew Garthwaite, suggest that the era of tech outperformance may be nearing its conclusion, with tech earnings per share growth likely peaking in comparison to non-tech sectors.
While UBS remains positive about software stocks, they caution that software has become a crowded trade, and forecasted earnings upgrades may have reached their peak. Nevertheless, UBS still considers valuations acceptable, highlighting Microsoft and SAP as “core holdings” and assigning a Strong Overweight rating to the software sector.
In contrast, the outlook for semiconductors appears more uncertain, with Garthwaite noting “many more warning signals on semis.” This includes earnings risk, with recent results exceeding trend by 15%, as well as concerns about overvaluation based on certain metrics. Additionally, the semiconductor sector faces significant risks from geopolitical tensions with China. Despite these challenges, UBS identifies several bright spots, including historically strong growth rates. Preferred picks in the semiconductor sector include Samsung Electronics, Analog Devices, Texas Instruments, Infineon, and TSMC.
UBS’s assessment of the “Magnificent 7,” which includes heavily weighted tech stocks in the S&P 500 such as Nvidia, Microsoft, Apple, Alphabet, Amazon.com, Tesla, and Meta Platforms, is more mixed. While the stock of Nvidia appears reasonable, it is considered expensive based on price-to-sales metrics, according to Garthwaite.
The warning signal for UBS arises when earnings decouple from performance, with Apple and Tesla cited as prime examples. Concerns about Apple stem from its status as primarily a hardware company trading at a software valuation, coupled with its reliance on a mature smartphone market and exposure to significant China and regulatory risks. For Tesla, UBS worries about potential overcapacity in the electric vehicle market and the risk of losing market share in China.
Meanwhile, in the realm of artificial intelligence, Elon Musk’s AI start-up xAI is set to release an updated version of its “truth-seeking” chatbot, Grok-1.5. This move aims to enhance the chatbot’s ability to seek truth even further. The updated version will be available to early testers and Grok users on the social-media platform X in the coming days, as announced by xAI on Thursday. Musk introduced the chatbot in November, emphasizing the need for an alternative to offerings from Microsoft and Google.