UBS downgrades US IT sector rating due to concerns over capex peaking and software uncertainty

2026-02-11 17:45:05

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Investing.com - UBS downgraded the U.S. Information Technology sector to Neutral on Tuesday, warning that the recent strength in tech stocks has masked increasing risks related to spending by large-scale cloud service providers and uncertainties in the software industry.

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In a report led by the bank’s Global Wealth Management Chief Investment Officer Mark Haefele, UBS noted that the S&P 500 Information Technology sector has risen 6% over the past two trading days, but “slowing capital expenditure growth by hyperscale cloud providers” and overvalued hardware suggest a more cautious stance is needed.

UBS believes that capital expenditure by hyperscale cloud providers could reach $700 billion this year, “more than quadrupling in three years,” and added that this level of investment now “almost entirely consumes hyperscale cloud providers’ operating cash flow.”

Investor concerns about sustainability could impact market sentiment, especially as spending increasingly relies on debt or equity financing.

UBS expects capital expenditure growth to slow from here, which could help improve perceptions of hyperscale cloud providers themselves, but may be a “potential negative factor for some companies at the support layer.”

The bank also emphasized ongoing uncertainties in the software sector, noting that artificial intelligence may “make it easier for competitors to encroach on existing software providers’ domains.”

UBS believes this threat makes it difficult for investors to have confidence in growth and profitability, warning that “uncertainty about the outlook could persist for some time.”

Hardware valuations are another concern. UBS stated that the tech hardware sector is mainly led by smartphone manufacturers and benefits from strong unit growth, but valuations now “appear to be fully priced.” The bank added that as replacement cycles normalize, the momentum for smartphones could weaken.

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