UBS Downgrades US Tech Stocks and Gives Three Main Reasons

　　Key Points

• UBS downgraded the US IT sector on Tuesday, citing ongoing uncertainty in the software industry and significantly increased capital expenditures.
• Before this adjustment by the Swiss investment bank, software stocks had just experienced a sell-off, making investors more cautious about the sector.
• UBS recommends that investors diversify their allocations into other sectors such as healthcare and utilities.

　　UBS downgraded its outlook on the US information technology sector on Tuesday, adopting a more cautious stance and warning that the market reaction to high corporate capital expenditures and the impact of AI is “divided.”

　　The trigger for the recent sell-off in software stocks was AI company Anthropic launching a new AI tool capable of handling professional workflows—capabilities that are core products of many traditional software companies.

　　Tech stocks rebounded on Monday, as investors hoped the market would continue to rise after a correction. The S&P 500 Software & Services Index (comprising 140 constituent stocks) surged about 3% on Monday.

　　UBS pointed out: “Uncertainty in the software industry may persist”, and competition among software companies is also intensifying.

　　In its report, the bank stated that this makes it difficult for investors to “have firm confidence in the growth rates and profitability of software industry companies.”

　　Mark Hawtin, Head of Global Equities at Liontrust Asset Management, told CNBC on Tuesday:

　　“Currently, the revenue generated by AI is completely mismatched with the scale of investment. This makes the outlook even more uncertain and harder to predict, and investors dislike uncertainty.”

　　UBS also emphasized that capital expenditures by cloud service providers have reached unsustainable levels, which may become a “bearish overhang” for investors, especially as such spending increasingly relies on “external debt or equity financing.”

　　Hawtin also stated, “The spending plans of several companies among the ‘Magnificent Seven’ are concerning.”

　　Alphabet, Microsoft, Meta, Amazon—these four major hyperscale cloud providers are expected to invest a combined total of nearly$700 billionin AI this year.

　　Amazon is projected to spend $200 billion this year, and its free cash flow in 2026 may turn negative, nearing $17 billion.

　　Hawtin said:

　　“If I were an investor, and I could get $60 billion in cash flow now, but would have to exchange it for uncertain future cash flow, that brings uncertainty and I should assign a lower valuation.” “For me, the key issue for these giants is increased risk. They are becoming highly capital-intensive, and we don’t know what the ultimate outcome of this capital expenditure will be, so they should be given lower valuations.”

　　The final reason for UBS’s downgrade is: valuations of tech hardware are already high, meaning stocks are getting more expensive for investors.

　　Recommendation to Diversify Allocations

　　UBS made it clear that this downgrade does not represent a “negative view on the entire tech sector,” but stressed that the opportunities brought by AI are not limited to just the technology and IT sectors.

　　“We believe investors should review their current exposure to US tech stocks and diversify the overweight portions... At the same time, they should reduce concentrated positions in individual software companies, especially those with single business models and no diversified operations.”

　　The bank recommends that investors diversify funds into areas such as banking, healthcare, utilities, communications services, and consumer discretionary.

Editor: Guo Mingyu