Global technology stocks have rebounded from their early August lows as risk sentiment has improved. The NASDAQ index has surged over 10% from its intra-session low on August 5, recovering more than half of the losses since the benchmark’s all-time high in July.
However, analysts at UBS caution that volatility may increase again until investors are confident that the U.S. economy is not heading into a recession. They also note that future gains in the tech sector could be slower due to risks associated with the U.S. elections and geopolitical tensions.
Still, the analysts believe that the recovery in tech stocks “has room to run, and we see tailwinds from both fundamental and technical perspectives.”
The ongoing tech rally has been largely driven by substantial investments in AI, with major tech companies set to boost their capital spending by 43% year-over-year in 2024. Despite common perceptions, the capex intensity—measured as capex divided by sales—of big tech firms remains below their historical highs.
"Our analysis shows that big tech’s capex could potentially increase by as much as 25% in 2025," the analysts highlighted. "This is much higher than the consensus projections of a 10-15% increase. This strong capital spending outlook is especially positive for AI enablers in the semiconductors field."
At the same time, recent earnings reports have underscored strong demand for AI and its growing adoption.
Taiwan Semiconductor Manufacturing Company (TSM) reported a 45% year-over-year increase in sales for July, an acceleration from June’s 33% growth.
Further, a Taiwanese chip-testing and packaging company announced a 57% increase in its planned 2024 capex due to rising AI demand, while another firm that assembles AI servers for major tech companies provided a strong second-half outlook following record profits in the second quarter, UBS noted.
Meanwhile, investor positioning is also turning supportive for tech shares.
The recent correction in the sector was partly due to the unwinding of yen carry trades, but these positions have mostly been liquidated, analysts point out, with leveraged funds' yen shorts at their lowest since February 2023.
Also, data shows hedge funds and retail investors are re-entering the market, and corporate buybacks are expected to rise as the earnings season wraps up.
“So, with some 15-20% earnings growth expected for the tech sector over the next six quarters, we see a compelling risk-reward outlook for global tech,” analysts continued.
“We believe AI should continue to drive growth in the years to come, and investors should ensure they have sufficient allocation to beneficiaries in the semiconductors and software industries.”