UBS revised its outlook on the U.S. Information Technology sector to neutral on Tuesday, pointing to increased caution among investors after a sharp rally in tech stocks. The move reflects UBS’ view that rising risks tied to hyperscaler capital expenditures and ongoing uncertainty in the software industry could temper future performance.
The bank’s Global Wealth Management highlighted that the S&P 500 IT sector climbed 6% over the last two sessions. However, UBS identified potential headwinds, including an expected slowdown in hyperscaler capital expenditure growth and hardware valuations that now appear stretched.
UBS estimated that hyperscaler capital spending could reach $700 billion in 2026, a leap to nearly four times the level seen three years prior. This surge in investment is reported to be absorbing almost all of the hyperscalers’ operating cash flow. UBS cautioned that growing reliance on debt or equity funding may add to investor concerns about the sustainability of such high spending.
The bank forecasts a moderation in capex growth going forward. While this may ease some worries about the hyperscalers themselves, UBS noted that this trend could negatively impact firms providing enabling technologies for these larger companies.
Uncertainty also persists in the software space. UBS noted that advances in AI are lowering barriers, making it easier for competitors to challenge established software providers. This dynamic, according to the bank, makes it harder for investors to feel confident about prospects for growth and profitability, with UBS warning that such uncertainty may continue for some time.
In hardware, UBS said current valuations are elevated, particularly among companies focused on smartphones, which have seen strong shipment growth. However, the bank suggested that this momentum may slow as consumer replacement cycles return to normal patterns.
Jefferies analysts recently suggested that a slowdown in AI-related spending could prompt a recovery in software equities following recent declines. Although software stocks have stabilized since last week’s downturn, some market observers remain cautious about the sector’s outlook.
