UBS has identified the recent sell-off in technology stocks as an opportunity for long-term investors, emphasizing the sector’s attractive valuations, solid fundamentals, and favorable technical factors.UBS has identified the recent sell-off in technology stocks as an opportunity for long-term investors, emphasizing the sector’s attractive valuations, solid fundamentals, and favorable technical factors. According to UBS, the sell-off was driven by a general shift from large companies to smaller ones. However, the firm believes that this is a temporary trend and that the technology sector will regain its leadership position in the coming weeks. UBS cites several reasons for its confidence: * Valuations: The technology sector has seen a significant sell-off, making valuations more attractive, especially compared to previous bubbles. * Fundamentals: The technology sector is expected to post strong earnings growth in the second quarter, driven by leading companies like Apple, Amazon, Microsoft, and Meta Platforms. * Technicals: UBS believes that the technical factors supporting the rotation to small-cap stocks are likely to dissipate, providing support for quality tech stocks. UBS encourages investors to ensure they have sufficient exposure to AI beneficiaries, both inside and outside the United States. The firm believes that the technology sector remains well-positioned for long-term growth and that the current sell-off presents a buying opportunity.
Spencer Platt/Getty Images; Bryan Erickson/Business Insider
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UBS sees the recent sell-off in technology stocks as a buying opportunity for long-term investors.
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The sell-off was driven by a general shift from large to smaller companies.
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UBS cites attractive valuations, solid fundamentals and declining technical factors as reasons to hold on to big technology companies.
This month’s sell-off in technology stocks presents a buying opportunity for long-term investors, according to a UBS report on Monday.
The selloff was exacerbated by a shift from large tech companies to smaller ones, leading some to question whether the multi-year trend of mega-cap tech companies outperforming the market is over.
But UBS says the recent decline in tech stocks is only temporary. That will become clear when the mega-cap tech stocks report their second-quarter earnings later this week.
“With results expected from several major companies this week, market volatility is likely to continue. But we believe the technology sector will find support and resume its leadership in the coming weeks,” UBS said.
UBS’s confidence comes from a combination of factors: attractive valuations, fundamentals and technicals.
“Technology valuations have become attractive again.”
According to UBS, the technology sector has seen a 10% sell-off nearly every year for the past decade, making the recent 9% drop in the Nasdaq 100 not unusual.
A healthy sell-off in technology stocks has led to more attractive valuations for the fast-growing sector, especially compared to previous bubbles.
“While the tech sector looks expensive after this year’s rally, price-earnings multiples are still much lower than in the dotcom era, when many tech stocks posted much lower earnings,” UBS said.
“The technical foundations remain solid.”
With Apple, Amazon, Microsoft and Meta Platforms reporting earnings this week, UBS expects the technology sector to post second-quarter net profit growth of 20% to 25%.
“Today’s technology leaders also offer high-quality margins, strong free cash flows and solid balance sheets, providing positive momentum amid slowing economic activity,” UBS said.
And that growth is expected to continue for many years to come, as the AI revolution requires massive investments in architecture, such as GPU chips from Nvidia and new data centers.
“As Alphabet CEO Sundar Pichai noted, ‘the risk of underinvesting is much greater than the risk of overinvesting,’” UBS stressed.
“Technical factors that support rotation will likely disappear.”
According to UBS, short squeezes, call option activity and bank hedging have created rotational trading in small-cap stocks, but that won’t last forever.
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“The positioning influence on rotation trading will dissipate quickly, as such tech stuff typically does after a month or so,” UBS said. “So we think the environment remains supportive for quality tech stocks and believe investors should ensure they have sufficient exposure to AI beneficiaries inside and outside the U.S..”
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