Investing.com -- The ongoing Q3 earnings season has introduced uncertainty into the tech sector, but it is unlikely to derail the broader AI growth story, according to UBS.
While a weak start to tech earnings—highlighted by the performance of semiconductor stocks such as ASML Holding NV (AS:ASML) ADR (NASDAQ:ASML)—has raised concerns, the divergence between strong AI demand and softer trends in consumer electronics remains a key theme.
ASML’s lower-than-expected 2025 sales forecast, driven by export controls and weaker non-AI semiconductor demand, sparked initial worries, sending semiconductor stocks tumbling on Tuesday.
However, UBS analysts argue that these developments don’t necessarily foretell the future of the tech industry as a whole.
“A weak start to the tech earnings season is unlikely to be a reliable predictor of the industry outlook,” they note.
October’s history of volatility in tech markets further complicates the picture, with the Nasdaq 100's realized volatility averaging 26% during this month over the past 40 years, compared to 22% in other months.
In addition to earnings, UBS expects geopolitical risks and potential export restrictions to contribute to this elevated volatility. The Biden administration’s consideration of new sales caps on advanced AI chips could also add uncertainty.
Despite these near-term risks, the AI growth story remains intact, particularly as major players in the AI supply chain continue to expand.
UBS highlights several examples, including Taiwan Semiconductor Manufacturing (NYSE:TSM)'s rapid development of advanced AI packaging facilities and Oracle Corporation (NYSE:ORCL)'s commitment to sizable computing clusters for data-intensive tasks. These moves suggest “a more constructive multi-year outlook” for AI-related investments.
“Without taking views on any single names, we continue to see a strong growth outlook for AI semis overall, and are closely watching management guidance on future demand in the days and weeks ahead,” UBS strategists said in a note.
Meanwhile, traditional consumer tech has experienced weaker demand, with lackluster sales in smartphones and PCs potentially continuing into 2025.
“Wait times for the latest iPhone series have been shorter compared to previous models,” and original design manufacturers are guiding for flat or slightly declining shipments in the fourth quarter, UBS pointed out. Nonetheless, the firm anticipates that new AI-driven features could accelerate replacement cycles, leading to a slight recovery.
In light of these mixed signals, UBS advises investors to review their tech exposure, ensuring sufficient allocation to AI beneficiaries.
“We forecast earnings growth of about 35% for our preferred AI companies this year,” the report states, suggesting that investors take advantage of volatility through structured strategies or a buy-the-dip approach on quality AI stocks.