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Tech Sector Faces Earnings Uncertainty Amid Continued AI Growth
The current third-quarter earnings season has raised concerns within the technology sector, yet analysts at UBS maintain that the broader narrative of growth in artificial intelligence (AI) is unlikely to be disrupted.
The early phase of this earnings season has been characterized by disappointing results, particularly among semiconductor firms such as ASML Holding NV. Their recent sales projections for 2025 fell short of expectations, mainly due to export restrictions and a decline in demand for non-AI semiconductor products, which led to a notable drop in semiconductor stock prices.
Despite this shaky start, UBS analysts caution against jumping to conclusions about the overall health of the tech industry. They emphasize that a weak performance in the beginning of earnings reporting does not necessarily indicate a negative trend for the sector long term.
“A weak start to the tech earnings season is unlikely to be a reliable predictor of the industry outlook,” they remarked, highlighting the complexities that October historically brings, including increased market volatility. Over the past four decades, realized volatility in tech stocks has averaged 26% during October, notably higher than the average of 22% in other months.
UBS also identifies geopolitical factors and potential restrictions on exports as contributing elements to this heightened volatility. The Biden administration’s consideration of new sales limits on advanced AI chips further adds to the uncertainty currently facing the sector.
Nevertheless, the enthusiasm for AI development appears robust. Major entities involved in AI supply chains are actively advancing their capabilities. For instance, Taiwan Semiconductor Manufacturing is significantly enhancing its advanced AI packaging facilities, and Oracle is committing substantial resources to build extensive computing clusters to support data-heavy applications. Such initiatives indicate a promising multi-year outlook for investments in AI technologies.
UBS analysts stated in a recent note, “Without taking views on any single names, we continue to see a strong growth outlook for AI semis overall, and are closely watching management guidance on future demand in the days and weeks ahead.”
On the flip side, traditional consumer technology products, particularly smartphones and personal computers, are experiencing a slowdown in demand. The analysts pointed out that wait times for the latest iPhone model have been notably shorter than for previous releases, with original design manufacturers forecasting stagnant or slightly declining shipments as we approach the fourth quarter. However, UBS remains optimistic that new features driven by AI could rejuvenate consumer interest and lead to a gradual recovery.
Given these contrasting trends, UBS advises investors to reassess their exposure to the tech sector, ensuring they maintain substantial investments in companies benefiting from AI advancements. The firm projects an earnings growth rate of approximately 35% for its preferred AI companies this year, encouraging investors to leverage market volatility through structured investment strategies or by purchasing quality AI stocks during downturns.
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