Tech stocks still a hot commodity? UBS Group AG advises: Seize the opportunity to buy on dips!

UBS released a report on Monday stating that the sell-off in tech stocks this month presents a buying opportunity for long-term investors.

The rotation from large-cap stocks to small-cap stocks has intensified the selling pressure on tech stocks, leading some to question whether the trend of large-cap tech stocks outperforming the market for years has come to an end.

However, UBS believes that the recent decline in tech stocks is temporary and should be evident later this week when large tech companies report their second-quarter earnings.

UBS stated, "Some large tech companies will report earnings this week, and market volatility may persist. But we believe the tech sector should find support in the coming weeks and lead the way again."

UBS's confidence in tech stocks comes from three aspects: convincing valuations, fundamentals, and technicals.

Tech stock valuations are becoming attractive again

According to UBS Group, tech stocks have experienced a 10% sell-off almost every year over the past decade, so the recent 9% drop in the Nasdaq 100 Index (NDX) is not unusual.

The healthy pullback in tech stocks has made the valuations of this rapidly growing sector more attractive, especially compared to the previous bubble period.

UBS stated, "Despite looking expensive after the rebound this year, the price-to-earnings ratio of tech stocks is still much lower than during the dot-com bubble era, when the earnings quality of many tech stocks was much lower."

Fundamentals remain solid

This week, Apple (AAPL), Amazon (AMZN), Microsoft (MSFT), and Meta Platforms (META) will sequentially release their earnings reports. UBS believes that the net profit growth of the tech industry in the second quarter should be between 20% and 25%.

UBS stated, "The current leaders of the tech industry still provide high-quality profit margins, strong free cash flow, and robust balance sheets, which is a positive driver in the face of slowing economic activity."

As the artificial intelligence revolution requires significant investments in infrastructure, such as NVIDIA's (NVDA) GPU chips and new data centers, this growth is expected to continue for many years.

As Alphabet (GOOG) CEO Sundar Pichai pointed out, "The risk of underinvestment is far greater than the risk of overinvestment."

Technical factors supporting rotation may fade

Short squeezes, bullish options activity, and bank hedging have driven the rotation trades that revitalized small-cap stocks, but this situation will not last forever.

UBS stated, "The impact of positions on rotation trades will quickly disappear, and this technical impact typically fades after a month. Therefore, we believe the overall environment still favors quality tech stocks and investors should ensure sufficient exposure to beneficiaries of artificial intelligence both domestically and internationally."