UBS on Tuesday downgraded the U.S. Information Technology sector to neutral, signaling a more cautious stance after a short-term rally in tech shares. The note, headed by the bank's Global Wealth Management Chief Investment Officer, Mark Haefele, said the S&P 500 IT sector has jumped about 6 percent over the last two trading sessions, but that headline strength masks rising risks.
Central to UBS's concern is hyperscaler investment. The bank estimated hyperscaler capital expenditure could amount to $700 billion this year - "a more than fourfold increase over three years" - and warned that this level of spending now "consume almost 100% of hyperscalers' cash flow from operations." UBS suggested that investor doubts about the durability of that spending may weigh on sentiment, particularly given that more of the outlays are being financed through debt or equity rather than internal cash generation.
While UBS expects capex growth to slow from current rates, the bank said that moderation would have mixed effects. A lower growth rate in hyperscaler capex might improve perceptions of the hyperscalers themselves, but UBS cautioned it could be "a potential negative for some companies in the enabling layer," referring to vendors and service providers that have benefited from the hyperscalers' spending surge.
The note also drew attention to persistent uncertainty across the software sector. UBS highlighted the potential for artificial intelligence to alter competitive dynamics, saying AI may "make it easier for competitors to encroach on incumbent software providers." That prospect, the bank said, makes it difficult for investors to take strong conviction on both growth trajectories and future profitability, and that "uncertainty about the outlook could linger for some time."
Hardware valuations were another focus. UBS pointed to a tech-hardware segment largely influenced by smartphone manufacturers, which has seen robust unit growth. The bank assessed that valuations in this area now "look full," and it warned that smartphone momentum could temper as replacement cycles normalize.
Overall, UBS's shift to neutral reflects a combination of elevated market moves and structural questions about the sustainability of capex-driven growth, the competitive implications of AI for software incumbents, and stretched valuations in parts of the hardware market.