UBS has suggested that the recent downturn in technology stocks presents a significant buying opportunity for investors looking at the long-term horizon, according to a report released Monday. The sell-off, driven partly by a shift away from large-cap stocks towards smaller companies, has prompted speculation about the end of the mega-cap tech dominance in the market.
However, UBS remains optimistic, asserting that the current decline is temporary and anticipates a rebound, especially as major tech giants prepare to announce their second-quarter earnings later this week.
“While market volatility may persist with pending earnings releases, we expect the tech sector to stabilize and resume its leadership role,” UBS stated.
The firm’s confidence is grounded in what it terms a trifecta of factors: compelling valuations, strong fundamentals, and favorable technical indicators.
“Tech valuations have become attractive once again,” UBS noted, pointing out that the recent 9% drop in the Nasdaq 100 is not unprecedented given historical trends where the tech sector typically experiences annual sell-offs of around 10%. This correction has made tech stocks more appealing, especially compared to previous market bubbles.
“Tech fundamentals remain robust,” UBS continued. With key players like Apple, Amazon, Microsoft, and Meta Platforms set to report earnings, UBS anticipates a solid second-quarter profit growth ranging from 20% to 25% for the sector.
“Today’s leading tech companies boast strong profit margins, substantial free cash flows, and healthy balance sheets, which are crucial amid a backdrop of economic slowdown,” UBS affirmed.
UBS also highlighted the enduring growth prospects of the tech sector, particularly as investments in artificial intelligence technologies, such as Nvidia’s GPU chips and new datacenters, continue to expand.
“Technical factors supporting the rotation are likely temporary,” UBS cautioned, referencing short-squeezes, call option activities, and bank hedging that have fueled the shift towards small-cap stocks. The firm predicts that these technical drivers will diminish in influence over the coming weeks.
“Investors should consider ensuring sufficient exposure to AI beneficiaries within and beyond the US,” UBS advised, echoing sentiments from Alphabet CEO Sundar Pichai about the imperative of robust investment in technology.
In conclusion, UBS believes that the current environment remains favorable for quality tech stocks and encourages investors to view the recent sell-off as an opportunity rather than a signal of long-term decline.
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