UBS sees continued opportunities in AI despite recent market volatility but cautions that investors are increasingly demanding evidence of sustainable revenue and returns from rising spending.

  • UBS said political and physical constraints could delay or raise the cost of data center projects, but are unlikely to eliminate demand.
  • The firm favors established tech platforms with existing computing capacity, visible AI revenues and strong balance sheets.
  • Beyond tech, UBS prefers U.S. industrials, health care and Eurozone equities, and recommends rebuilding allocations to high-quality bonds.

UBS Wealth Management said Tuesday that the recent selloff in artificial intelligence (AI) stocks represented a “positioning reset” rather than the beginning of a lasting downturn in the AI investment cycle.

UBS said in its CIO Daily Update that elevated investor positioning, high expectations and uncertainty surrounding data center development had amplified the decline.

“In our view, the rebound this week primarily reflects dip buying and a reversal of some of last week’s sharp de-risking,” the firm said, referring to Monday's market rally.

The Philadelphia Semiconductor Index (SOX) gained marginally today, extending Monday’s 6.9% gains. Despite the recent correction, the index remains 48% up year to date. The iShares Semiconductor ETF (SOXX) is up around 41%.

UBS Sees AI Spending Reaching $1.5 Trillion By 2028

UBS forecasts aggregate AI capital expenditure of $1 trillion in 2026, rising to $1.4 trillion in 2027 and $1.5 trillion in 2028. The firm pointed to accelerating cloud revenue and growing advance orders for computing capacity as signs that underlying AI demand remains robust.

While political and physical constraints could delay, relocate, or raise the cost of data center projects, UBS believes they are unlikely to eliminate demand. “Regulation may therefore redistribute and extend the investment cycle rather than derail it,” the firm said.

AI Stocks Could Face More Volatility

UBS cautioned that this week's market rebound does not eliminate the risks that contributed to the previous selloff. “Investors are increasingly demanding evidence that rising AI spending will generate sustainable revenue, utilization, and returns,” UBS said.

With expectations remaining high and investor positioning concentrated, the firm said individual technology stocks could remain sensitive to changes in corporate guidance, regulation and financing conditions.

“Further technology volatility would therefore not be surprising,” UBS added.

The firm also highlighted declining oil prices as a near-term tailwind for equities, although it warned that renewed supply disruptions could reverse the trend.

UBS had identified Tuesday's inflation report as an important test for the rebound. October Consumer Price Index (CPI) inflation subsequently rose 0.4% month-over-month, exceeding expectations of 0.3%, while core inflation also surpassed forecasts.

Where UBS Sees Investment Opportunities

UBS recommends maintaining exposure to the structural AI opportunity while managing excessive concentration in individual technology stocks. “We favor established technology platforms with existing computing capacity, visible AI revenues, strong balance sheets, and the ability to finance investment internally,” the firm said.

At the time of this writing, the Nasdaq-100 was marginally in the green. On Stocktwits, the sentiment around Invesco QQQ Trust (QQQ) remained ‘bearish’. 

Beyond technology, UBS prefers US industrials and health care, alongside Eurozone equities, where it expects earnings growth similar to that in the US in 2027 but at lower valuations.

The firm also recommends rebuilding underweight allocations to high-quality short- and medium-term bonds to help diversify portfolios during periods of equity volatility. 

See Also: October CPI Comes In Hotter Than Expected — Morgan Stanley Strategist Says 50-Basis-Point Fed Hike Would Be ‘Too Far’

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