Use the sell-off in tech stocks as an opportunity to buy the dip, says UBS

• UBS sees the recent sell-off in technology stocks as a buy-the-dip opportunity for long-term investors.

• The sell-off has been caused by a general shift from large-cap companies to smaller companies.

• UBS cites attractive valuations, solid fundamentals and declining technicals as reasons to stick with large-cap tech.

This month sell-off of technology stocks represents a buy-the-dip opportunity for long-term investors, according to a Monday note from UBS.

The sell-off was further exacerbated by a rotation from large capitalization stocks to smaller companies, Some wonder if the years-long trend of mega-cap tech stocks outperforming the market is over.

But according to UBS, the recent decline in tech stocks is only temporary, and that should become clear when the mega-cap tech stocks report their second-quarter earnings results later this week.

“With results from some major companies still due this week, market volatility is likely to persist. But we think the technology sector should find support and resume its leadership in the coming weeks,” UBS said.

UBS’s confidence comes from three factors: attractive valuations, fundamental factors and technical factors.

“Tech valuations have become attractive again.”

The tech sector has experienced a 10% sell-off almost every year for the past decade, so the recent 9% decline in Nasdaq100 is not unusual, according to UBS.

A healthy sell-off in technology stocks has led to more attractive valuations for the fast-growing sector, especially compared to previous bubbles.

“While the tech sector appears to be expensive after this year’s rally, price-to-earnings ratios remain much lower than in the dot-com era, when many tech stocks posted much lower quality profits,” UBS said.

“The technical fundamentals remain solid.”

Of Apple, Amazon, MicrosoftAnd Metaplatforms on deck this week to report earnings, UBS says the technology sector should see net profit growth of 20% to 25% in the second quarter.

“Today’s technology leaders also offer high-quality margins, strong free cash flows and solid balance sheets, a positive driver amid slowing economic activity,” UBS said.

And that growth should continue for many years, as the AI ​​revolution requires massive investments in architecture. such as Nvidia’s GPU chips and new data centers.

“As Alphabet CEO Sundar Pichai noted, ‘the risk of underinvestment is dramatically greater than the risk of overinvestment,’ UBS pointed out.

“Technical factors supporting the rotation are likely to fade.”

Short squeezes, call option activity and bank hedging have fueled rotational trading in small-cap stocks. but that won’t last forever, according to UBS.

The story continues

“The positioning influence on rotation trading will disappear quickly, as such technical data typically does after about a month,” UBS said. “So we think the environment remains favorable for high-quality technology stocks, and believe investors should ensure they have adequate exposure to AI beneficiaries inside and outside the US.”

Read the original article Business insider