UBS has cautioned that valuations in artificial intelligence stocks are reaching heights reminiscent of the dotcom boom, raising concerns about sustainability despite record levels of investment from U.S. tech giants.
According to the bank, the U.S. technology sector is currently trading at a HOLT Economic price-to-earnings (P/E) multiple above 35 times—levels comparable to those seen just after the dotcom bubble. HOLT Economic is UBS’s proprietary valuation and performance framework.
The firm noted that such lofty valuations suggest much of the sector’s market capitalization is being driven by expectations of future cash flows rather than earnings being generated today.
That leaves “little room for cash flow disappointments,” said Michel Lerner, head of the HOLT analytical service at UBS, citing uncertainties tied to the returns on heavy capital expenditure, energy constraints facing data centers, and intensifying competition, particularly from China.
Artificial intelligence has become a recurring theme in earnings calls, with one in four company reports now making reference to the technology, UBS highlighted.
The surge has also been fueled by unprecedented capital expenditures and R&D budgets. Meta Platforms (NASDAQ:META), Alphabet (NASDAQ:GOOGL), Amazon (NASDAQ:AMZN), and Microsoft (NASDAQ:MSFT) are expected to collectively invest $350 billion this year—an amount larger than the total annual capex of all publicly listed energy and utility companies across the U.S. and Europe.
Lerner also pointed out that Apple (NASDAQ:AAPL), Nvidia (NASDAQ:NVDA), and Broadcom (NASDAQ:AVGO), together with the major hyperscalers, spent more on research and development in 2024 than all listed European equities combined.
Altogether, these firms are projected to generate 37% of total U.S. economic profit in 2025, more than six times the contribution of Europe’s equity market.
However, “many of the use cases are premised on future, rather than current revenue opportunities,” Lerner said, noting that even leaders in the industry are urging caution. UBS cited OpenAI CEO Sam Altman, who recently admitted the sector may be experiencing a bubble.
Supporting that view, a recent MIT study found that 95% of current generative AI pilots are failing to deliver immediate revenue growth, underscoring the gap between market enthusiasm and actual returns.
Lerner further warned that Big Tech’s cash flow strength could face headwinds, with consensus forecasts suggesting declines in Cash Flow Return on Investment (CFROI) for Amazon, Meta, Microsoft, and Alphabet over the next two years, reversing recent positive trends.
Another potential challenge is the mismatch between hyperscaler spending and the ability of utility providers to supply sufficient power, which could weigh on profitability.
In light of these risks, UBS advised investors to diversify their portfolios, highlighting opportunities in non-U.S. quality growth stocks, global names included in secular growth ETFs outside of U.S. AI, as well as sectors such as real estate, utilities, energy, communication services, and staples, which historically have shown lower correlation with U.S. technology performance.
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