Tech rally could have more room to run: UBS By Investing.com

Global tech stocks rebounded from early August lows as risk sentiment improved. The NASDAQ index is up more than 10 percent from a session low on Aug. 5, recouping more than half of the losses since the benchmark’s all-time high in July.

However, analysts at UBS warn that volatility may rise again until investors are confident that the US economy is not headed for a recession. They also note that future gains in the tech sector could be slower due to risks associated with the US election and geopolitical tensions.

Still, analysts believe that the recovery in tech stocks “is underway and we are seeing tailwinds from both a fundamental and a technical perspective.”

The ongoing tech rally has been largely driven by substantial investment in AI, with major tech companies set to increase capital spending by 43% year-over-year in 2024. Despite common perceptions, investment intensity – measured as investment divided to sales – of the big tech firms remains below their all-time highs.

“Our analysis shows that large technology investments could increase by as much as 25% in 2025,” the analysts pointed out. “This is much higher than consensus forecasts of 10-15% growth. This strong capex outlook is particularly positive for semiconductor AI enablers.”

At the same time, recent earnings reports have highlighted strong demand for AI and its growing adoption.

Taiwan Semiconductor Manufacturing Company (TSM) reported a 45% year-over-year increase in sales, an acceleration from June’s 33% increase.

Moreover, a Taiwanese chip testing and packaging company announced a 57% increase in its planned capital for 2024 due to rising demand for AI, while another firm that assembles AI servers for big tech companies offered a strong outlook for the second half after record profits in the second. quarter, UBS noted.

Meanwhile, investor positioning is also turning favorable for tech stocks.

The sector’s recent correction was partly due to the deconsolidation of yen trades, but these positions have largely been liquidated, analysts point out, with leveraged funds’ yen losses at their lowest level since February 2023.

The data also shows that hedge funds and retail investors are reentering the market, and corporate buybacks are expected to pick up as earnings season winds down.

“Thus, with earnings growth of around 15-20% expected for the tech sector over the next six quarters, we see a compelling risk-reward outlook for global tech,” the analysts continued.

“We believe AI should continue to drive growth in the coming years, and investors should ensure they have sufficient allocation to beneficiaries in the semiconductor and software industries.”