By Jack Denton and Callum Keown
Technology stocks have been a driving force behind the S&P 500's march to record highs this year -- but that period could soon be over, according to strategists at UBS. Some popular names may be vulnerable.
The S&P 500 closed at a record high on Thursday, with the index up 10% so far this year. Much of that rally has been thanks to gains in tech stocks, with the S&P 500 Information Technology subgroup up 12.5% since the start of 2024. Expectations that the Federal Reserve will cut interest rates multiple times this year and the continued investor frenzy over artificial intelligence have been major tailwinds for tech.
However, "we think we are getting late into the tech outperformance innings with tech earnings per share growth peaking versus non-tech," Andrew Garthwaite and other strategists at UBS wrote in a Thursday note.
The strategists are generally upbeat about software stocks, though they warn that software has been a crowded trade and forecast earnings upgrades have likely peaked. Otherwise, UBS still sees valuations as acceptable -- preferring Microsoft and SAP as "core holdings" and a Strong Overweight rating on the software sector.
The outlook is a bit more clouded for semiconductors, wrote Garthwaite, with "many more warning signals on semis" including earnings risk, with recent results 15% above trend. Semiconductors also look overvalued based on some metrics, the strategists added, and the sector has considerable risk from China, where geopolitical tensions have held nasty surprises. Garthwaite noted several bright spots including historically the best growth rate, with the strategists preferring Samsung Electronics, Analog Devices, Texas Instruments, Infineon, and TSMC.
Not-So-Magnificent 7?
And what about AI chip darling Nvidia? The stock "looks reasonable...but clearly expensive on price to sales," noted Garthwaite. UBS is, indeed, more mixed on the Magnificent 7, which are heavily weighted tech stocks in the S&P 500 including Nvidia as well as Microsoft, Apple, Alphabet, Amazon.com, Tesla, and Meta Platforms.
"The warning signal to us is when earnings decouple from performance. The two obvious examples of this are Apple and Tesla," Garthwaite wrote.
UBS's concerns about Apple center on the fact that it is mostly a hardware company on a software valuation, with its heavy reliance on a mature smartphone market and outsize China and regulatory risks. For Tesla, the strategists worry about Tesla having overcapacity in electric vehicles and losing market share in China.
Chatbot Race Intensifies
Elon Musk's AI start-up xAI will launch an updated version of its "truth-seeking" chatbot Grok, presumably so it can seek even more truth.
Grok-1.5 will be available to early testers and Grok users on the social-media platform X in the coming days, xAI said Thursday. Musk unveiled the chatbot in November and said an alternative to Microsoft and Google's offerings was needed.
Write to Jack Denton at jack.denton@barrons.com and Callum Keown at callum.keown@barrons.com
This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.
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March 29, 2024 06:00 ET (10:00 GMT)
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