Analysts at UBS downgraded U.S. information technology stocks on Tuesday, even following a market bounce. The Swiss financial institution shifted its view on the sector from attractive to neutral.
UBS highlighted three primary justifications for the downgrade, according to CNBC.
- Software Volatility: The bank noted that "software uncertainty could linger," largely due to competitive pressures and new AI tools replacing traditional programs.
- Excessive Spending: Massive investments in infrastructure by hyperscalers like Amazon.com, Inc. (NASDAQ:AMZN) and Microsoft Corp. (NASDAQ:MSFT) are raising eyebrows. UBS mentioned that "mixed investor reactions" to high capital costs and mounting debt are creating a significant “overhang.”
- High Prices: UBS indicated that "tech hardware valuations look full," suggesting these shares have become too pricey.
Mark Hawtin from Liontrust Asset Management echoed these concerns on CNBC.
"The amount of revenue being generated by AI at the moment doesn't stack up relative to the amount being spent," Hawtin said.
He further noted that the shift toward capital-heavy business models increases risk:
"They're becoming very capital-intensive. We don't know what the outcome of that capital expenditure is going to be, and therefore, we should pay less for them."
While UBS is not entirely bearish on innovation, it suggested that investors look for AI opportunities outside the IT sector.
"Investors should also review concentrated exposures to individual software firms, and particularly those ‘pure play' companies that do not have diversified business models," UBS wrote, per CNBC.
Instead of sticking solely with tech, the bank advises moving capital into sectors like healthcare, utilities and banking.
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