AI bull market fully revitalized? UBS: Recent correction is just a "summer shakeout," earnings season expected to propel the rally further

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After a period of correction, Wall Street's attitude toward the artificial intelligence sector is turning optimistic again. UBS pointed out in its latest strategy report that the previous pessimistic expectations for AI-related assets have become excessive, and recent adjustments reflect capital flows and changes in positions rather than a deterioration in industry fundamentals.

With the US stock earnings season kicking off, UBS expects that corporate performance may once again verify the high prosperity of the AI industry chain, drive continued upward revisions of profit expectations, and become a new catalyst for the sector's performance. In addition to AI, the healthcare sector is also a key allocation direction for UBS due to improved earnings revisions and accelerated penetration of AI applications. The consumer sector, however, remains at the bottom of the theme rankings due to weak earnings momentum.

Meanwhile, Barclays data shows that the current market's profitability remains highly concentrated in a few sectors. The proportion of stocks outperforming the S&P 500 in the past year is notably lower than the historical average, reflecting that capital is still focusing on main lines with upward earnings revision logic.

UBS: AI Regains Position as the Strongest Investment Theme

According to a client report released Wednesday by UBS strategist Gerry Fowler's team, the bank's "Theme-o-Meter" used to measure market theme prosperity indicates that the AI theme has regained the top spot among all investment themes, mainly benefiting from continued improvement in profit expectations and a warmer macro environment.

He stated: "We expect that the earnings season will further strengthen the trend of upward earnings revisions and continue to drive AI theme outperformance."

UBS believes that the recent correction of the AI sector is inconsistent with industry fundamentals, mainly affected by summer deleveraging, profit-taking, and position rebalancing, rather than any substantial change in industry outlook.

Stephen Ju, an analyst responsible for internet research, further noted that demand for AI still continues to exceed the supply capacity of infrastructure, and capital expenditures by hyperscale cloud service providers are likely to continue rising, thus further improving the profit outlook for the entire AI industry chain.

Healthcare Becomes an Important Allocation Direction Outside AI

UBS simultaneously raised its rating for the healthcare sector. The strategists believe that the cycle of earnings downgrades in this sector is nearing its end, fundamentals continue to improve, the regulatory environment is stabilizing, and market sentiment is recovering. UBS expects that the long-term growth potential of the weight loss drug market is considerable, major pharmaceutical companies have strong earnings resilience, and the biotechnology sector could benefit from revived M&A and product catalysts.

At the same time, AI is accelerating its application in drug research, clinical development, and medical diagnostics, helping the life sciences tools industry emerge from its inventory cycle, and the entire sector is entering a new phase of earnings improvement.

In contrast, UBS continues to list consumer staples and discretionary consumption as the weakest current themes, believing that both sectors still lack sustained earnings upgrade drivers. Barclays data also shows that only 37% of stocks have outperformed the S&P 500 in the past 12 months, lower than last quarter's 40% and the seven-year historical average. Excess returns in the market remain concentrated in a few themes with the ability to continuously improve earnings, and the divergence among individual stocks is still pronounced.

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