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UBS WARNS OF 'AI CAPEX TAPER TANTRUM' AS MAG 7 STOCKS SLIDE

UBS cut its exposure to semiconductor and hardware stocks in its artificial intelligence portfolio, warning that pressure on Magnificent Seven shares could raise the risk of future AI capital-expenditure cuts by hyperscalers.

The brokerage said the "medium-term AI demand story remains intact," but added it was "monitoring the risk that a significant decline in hyperscaler stocks may pressure management to reduce capex commitments in the future."

UBS said Big 5 hyperscaler shares had "significantly declined by an average of 20% in June alone," increasing pressure to justify returns on AI spending.

UBS said it remained "significantly underweight the Mag 7," with a combined portfolio weight of about 18%. Within the group, the brokerage ranked Apple AAPL.O first, followed by Nvidia NVDA.O, Alphabet GOOGL.O, Microsoft MSFT.O, Amazon AMZN.O, and Meta Platforms META.O.

On Thursday, Apple raised iPad and MacBook prices, citing surging memory and storage chip costs driven by AI datacenter demand as suppliers such as Micron MU.O prioritize orders from Nvidia and other AI chipmakers.

The key risk, UBS said, is an "AI capex taper tantrum." The brokerage said Microsoft could slow capex expansion if investors push harder on free cash flow, while Meta may "lease out part of its in-house GPU (Graphics Processing Unit) capacity to external customers" to improve free cash flow.

UBS reduced its combined semiconductor and hardware weight to about 61% from roughly 76%, citing profit-taking following a Micron Technology-driven rally and strong gains across AI supply chain names.

Lower-cost AI models could also raise questions about spending. Still, the brokerage said "Jevons' paradox will hold" — referring to the idea that lower costs can drive higher overall usage — with lower AI token costs increasing demand for agentic AI workloads.

(Akriti Shah)

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