UBS strategists say investors grew too pessimistic on AI and flag another recently struggling stock-market sector as an attractive complement
UBS says investors have gotten too pessimistic about the artificial-intelligence theme and earnings could prove it.
As earnings season gets underway, festering worries about artificial-intelligence stocks could be put to bed.
So it seems based on UBS's "theme-o-meter," which gauges which market themes are rising to the top and the ones sinking to the bottom. Strategists identify themes based on a quantitative formula, evaluating macroeconomic regimes, earnings, valuation and sentiment.
"AI themes have moved back to the top of the rankings, supported by strong earnings revisions and favorable macro regime signals. We expect earnings season to reinforce the upgrades driving outperformance," a team of strategists led by Gerry Fowler told clients in a note on Wednesday.
To Fowler and the team, investors were dismissing the group's fundamental strength.
"The recent weakness in many AI-linked stocks appears inconsistent with the underlying fundamentals picture. In our view, some of the underperformance reflects summer deleveraging, profit-taking and positioning adjustments rather than a material deterioration in the outlook," they said.
UBS analyst Stephen Ju is of the opinion that hyperscaler capital-expenditure expectations will be revised up rather than down, as AI demand continues to exceed infrastructure capacity. He expects the broader AI supply chain will benefit, keeping earnings revisions more positive for longer, he said.
Those upward earnings revisions could be seen across chips, memory, power and infrastructure beneficiaries - particularly in Europe. The European AI enablement, electrification and renewables themes are "screening among the strongest opportunities in our framework, and, in several areas, are now as attractive as - or more attractive than - equivalent U.S. themes," said the strategists.
Another rising theme is healthcare XLV, which the strategists say is an attractive complement to AI.
Fowler and his team see the revision cycle for healthcare starting to turn after spending much of 2025 as one of the biggest sources of earnings downgrades. "We moved overweight on the sector well before the inflection became visible in consensus estimates, arguing that the downgrade cycle was close to exhaustion," they said.
The strategists said fundamentals are improving, the regulatory backdrop is stabilizing and stronger sentiment is helping to stabilize earnings expectations across parts of the sector.
Global obesity is one major growth story across global equities, and the UBS analysts expect "substantial growth" in GLP-1 adoption through the decade's end, they revealed, with Eli Lilly $(LLY)$ and Novo Nordisk (NVO) seen as the biggest beneficiaries.
Beyond obesity, they see opportunity for large-cap pharmaceuticals, which continue to generate resilient earnings growth even amid patent-expiry worries. The biotech group IBB is benefiting from resurgent M&A activity and a "richer pipeline" of potential catalysts through drug trials and other events.
Healthcare is also "increasingly becoming an AI beneficiary in its own right," observed the UBS team. "AI-driven drug discovery, clinical development and diagnostics are beginning to improve productivity across the sector, while life science tools appear to be emerging from a multiyear destocking cycle."
With improved access to capital, increasing FDA approvals and rising deal activity, "the backdrop increasingly resembles the early stages of a new earnings cycle rather than the later stages of the last one," the strategists said.
As for the weakest themes, UBS flagged the consumer-staples and consumer-discretionary sectors, citing macroeconomic worries and insufficiently positive earnings revisions.
Using a quantitative-plus-fundamental framework to pick stocks, these names came out at the top of a UBS screen: Iberdrola (ES:IBE), Infineon (XE:IFX), SSE (UK:SSE), Talen Energy $(TLN)$, Alphabet $(GOOGL)$, Prysmian (IT:PRY), VAT Group (CH:VACN), Broadcom $(AVGO)$ and Halma (UK:HLMA).
