Volatility in the global technology sector has climbed to its highest level since the dot-com crash, according to a new UBS HOLT report. The bank finds the five biggest hyperscalers face a combined $227 billion funding gap next year, while chip-sector valuations assume today's elevated returns hold for another five years.
Volatility in the global technology sector has reached its highest level since the dot-com crash, UBS's HOLT research unit found, as investors reassess whether the AI-driven cash flow returns of hyperscalers and semiconductor companies can be sustained. The bank's analysis points to mounting strain from AI infrastructure spending: heavy data-centre investment is eroding asset efficiency at major hyperscalers even as profit margins hold up, driving down their cash flow returns on investment (CFROI) through 2028.
Hyperscalers face a $227 billion funding gap
UBS estimates the top five hyperscalers — Microsoft, Meta, Alphabet, Amazon and Oracle — face a combined $227 billion funding gap next year against their operating and financing commitments. Of roughly 650 large capital-expenditure surges since 1998, 60% were followed by a permanent decline in CFROI, with the effect most pronounced among companies whose starting returns were already elevated.
Semiconductor returns triple, but valuations bet on longevity
Semiconductor returns have roughly tripled to around 30%, a level matched by fewer than 1% of companies since 1990. UBS notes that current valuations assume these elevated returns will persist for five years, a scenario that runs counter to typical competitive dynamics. The report points to Chinese AI developers DeepSeek and Moonshot as evidence that semiconductor economic moats may not be unassailable, since China tends to prioritize market share over profitability.
Software stocks have already reset
Software, enterprise-data and services stocks have already seen their valuations reset, with aggregate price-to-book ratios down about 40% over the past 18 months on fears of AI-driven disruption. Historically, 80% of stocks that derated by a comparable amount failed to regain prior valuation levels within a decade, UBS found.
Looking beyond tech, UBS points to Value and Low Volatility as the strongest-performing style factors during past tech-led selloffs, with Value outperforming in all six major episodes since 2004 and Low Volatility in four. But the bank cautions both approaches carry limits now: Value's link to the economic cycle has weakened since 2023, while Low Volatility stocks tend to underperform outside selloff periods unless paired with strong underlying fundamentals.
Source: Investing.com
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