UBS downgraded the U.S. technology sector. Sell or buy shares?

UBS, Switzerland's largest bank, downgraded its outlook for the U.S. IT sector, taking a more cautious stance and warning of a "mixed investor reaction" to the high capital expenditures of cloud giants and the impact of AI on the software market. Meanwhile, other analysts see the recent sell-off in IT stocks as excessive and expect them to rise. Among them is JPMorgan, which suggested investors take a closer look at three stocks.

Swiss investment bank UBS has downgraded the U.S. IT sector from Attractive to Neutral, CNBC reports. UBS analysts named three key reasons for this decision: the growth of investor selectivity with regard to technology stocks, capital outflow from the sector, as well as fears that artificial intelligence will replace traditional software tools.

According to UBS, "uncertainty in the software segment may persist". The bank also pointed to growing competition among software producers. This makes it difficult for investors to form "conviction in the growth rates and profitability of companies operating in the industry," according to the UBS note, quoted by CNBC.

The investment bank also noted that capital expenditure by cloud providers has reached unsustainable levels: this could be a "drag" on investors, especially as spending is increasingly financed through "external debt or equity issuance". In addition, according to UBS, " technology equipment valuations look overheated," indicating that such stocks are becoming increasingly expensive for investors.

UBS clarified that the downgrade does not reflect a "negative view of technology in general," but emphasized that the opportunities associated with AI go beyond the technology and IT sector alone. "We do believe that investors should review current positions in U.S. technology assets or diversify investments if they exceed index levels. Investors should also analyze concentrations in individual software companies, especially those 'pure players' whose business model is not diversified," UBS said in the report.

The bank advised investors to diversify their portfolio towards sectors such as banks, healthcare, utilities, communication services and non-essential consumer goods.

In early February, software developer stocks caught a sell-off after AI startup Anthropic released an AI agent capable of handling professional workflows - products that have traditionally been at the core of many software vendors' offerings. Anthropic's product signaled to the market that the "protective moats" of established businesses could be broken down by more advanced AI technologies, Bloomberg wrote.

The software sector has lost $2 trillion in market capitalization since its peak, and its share of the S&P 500 index has fallen from 12% to 8.4%, a group of JPMorgan strategists led by Dubravko Lakos-Buyas calculated. Despite rebounding on Friday and Monday, the index remained 28% below its September record, CNBC wrote.

JPMorgan believes that the market has gone too far and is now factoring into prices worst-case scenarios related to the impact of AI on software companies, the realization of which is "unlikely," at least in the next three to six months. This perceived risk of technological disruption has led to indiscriminate declines in both quality and speculative-grade securities of software companies, Lakos-Buyas noted. The strategist emphasized that the level of short positions in software stocks is at record highs and hedge funds are currently favoring AI processor makers at the expense of the software sector - a configuration that shifts the balance of risks toward a rebound soon, according to the bank.

"Given the complete reshuffling of positions, overly bearish sentiment on the impact of AI on software, and solid fundamentals, we believe the balance of risks is increasingly shifting towards recovery, especially in high-end software segments (e.g. cybersecurity)," the bank said in a note quoted by CNBC. - Therefore, while further declines cannot be ruled out, we recommend investors increase their exposure to a basket of higher-quality, AI-resistant software companies."

JPMorgan has published a list of software developer stocks that analysts believe are the most resilient to AI threats. Among them are software developer and cloud service owner Microsoft, cloud storage platform Snowflake, cybersecurity solution providers CrowdStrike and Zscaler, and enterprise process automation software developer ServiceNow.

Goldman Sachs chief executive David Solomon also considers the selloff in software developer stocks excessive, Bloomberg writes. "I think the narrative last week was somewhat over-generalized," he said Tuesday at a UBS Group conference in Florida. - There will be winners and losers - many companies will adapt and do just fine."

Solomon also also said that the U.S. economy is likely to show strong growth this year. "The macroeconomic environment is generally very favorable," he noted. That said, Solomon warned investors that disruptions similar to April 2025, when duties imposed by Trump caused the U.S. stock market to plummet, were possible during the year.

"I expect something like this to happen - some point in the year that will be a headwind, cause a revaluation or a market slowdown," he said, adding that factors such as trade, inflation and geopolitics are likely to remain causes for concern.

This article was AI-translated and verified by a human editor