UBS warns AI stocks are overheating as growth expectations collide with history

UBS said the April rally in US equities was a 2.8 standard deviation event over the past 25 years, while its own crowding data shows mega-cap tech stocks remain heavily crowded long positions.

The bank’s quantitative research found that every one of the Magnificent Seven stocks, excluding Tesla but including Broadcom, registers as an extremely crowded long, as do eight of the 12 largest global semiconductor companies by market capitalisation.

Market-implied returns and growth expectations for the median AI stock have hit all-time highs, UBS said, meaning investors are effectively assuming these companies are immune to the competitive dynamics that have governed every other corporate lifecycle in history.

Against that backdrop, UBS highlighted three specific risks.

First, the hyper-scalers are shifting from asset-light to asset-heavy business models. On consensus projections, their capital expenditure as a proportion of sales is set to rise from 10-20% in 2024 to above 30% by 2028, rivalling the capital intensity of telecoms and utilities.

History shows that higher capital intensity typically leads to lower returns on investment, and on current forecasts, all of the top eight US tech stocks except Amazon are expected to see their cash flow return on investment (CFROI), a measure of the cash return a company generates relative to the capital invested, decline over the next three years.

Second, semiconductor stocks are tracking record returns of around 30% CFROI this year. UBS noted that historically only 2% of all companies achieve such returns, and only one in five of those maintain them a decade later.

At the extreme, Nvidia’s CFROI is expected to reach 82% this year. Only 0.09% of global stocks have historically sustained a return above 50% for five years, and just 0.02% for ten years.

Third, growth expectations risk colliding with the law of large numbers. By 2028, the revenue increase projected for the top eight US tech firms relative to 2025 levels is equivalent to the GDP of Turkey.

Absolute sales by that point would match the GDP of the UK. Amazon alone is expected to generate over $1 trillion of revenues in three years, an increase of $350 billion that previously took more than five years to deliver.

UBS said on average only one in five companies historically sustains the 16% aggregate sales growth rate currently expected of the top eight tech names over the next three years.

The bank argued that the risks strengthen the case to diversify. It highlighted AI infrastructure and power providers as offering exposure to the theme at much lower implied growth rates, alongside non-AI stocks with similar return trajectories trading at more reasonable valuations, favouring US and emerging market names over European ones.

For investors seeking further diversification, UBS pointed to stocks in sectors whose returns have been most uncorrelated to tech since 2020, including consumers, materials, healthcare, real estate and non-US utilities. Among UK-listed names, Halma, Glencore, BP and Kingspan all featured on its screens.