UBS analysts suggest that the recent sell-off in tech stocks presents tactical opportunities for investors.
Last week, the Nasdaq experienced a 2.1% decline, surpassing the S&P 500's 0.8% loss. This downturn has turned first-half outperformers into relative underperformers, while the Russell 2000 small-cap index rose by 10.4% since early July, in contrast to tech's 2.1% drop.
The bank explains that a key factor behind this reversal is the mixed interpretation of recent earnings reports from prominent tech companies. Despite a strong rally since late last year, they note there are concerns about the pace and timing of AI revenue have grown, affecting continued investments in AI infrastructure.
This ongoing volatility is expected to persist with more earnings reports due this week. However, UBS analysts believe that the tech sector will find support and resume its leadership role in the coming weeks.
"The recent pullback creates a re-entry opportunity, especially for those companies with strong earnings growth visibility," UBS notes. They believe tech valuations have become attractive again, with global tech benchmarks having declined 9-10% from recent peaks.
The bank highlights that historically, tech indexes typically rebound strongly within six months after a 10% correction. This presents tactical opportunities for investors.
"With key global tech benchmarks having declined 9-10% from their recent peaks, this provides investors with some tactical opportunities, in our view," adds UBS.
While tech stocks may appear expensive post-rally, UBS points out that current price-to-earnings multiples are significantly lower than those during the dot-com era. "Today's tech leaders offer high-quality margins, strong free cash flows, and solid balance sheets," UBS emphasizes.
These fundamentals are particularly positive amid slowing economic activity. Moreover, AI is anticipated to be a key growth driver in the coming years.
Overall, UBS retains a bullish outlook on the tech sector, viewing the recent correction as an opportunity for strategic investments.