LIVE MARKETS-Truist says tech selloff tests investors' AI conviction

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TRUIST SAYS TECH SELLOFF TESTS INVESTORS' AI CONVICTION

A sharp selloff in US technology stocks is testing investors' conviction in the artificial intelligence trade, according to Truist's Keith Lerner and Jake Reid.

Technology shares came under pressure after hitting record highs earlier this month, as investors reassessed whether the industry's massive spending on AI infrastructure will translate into profits quickly enough to justify lofty expectations.

The S&P 500 tech sector .SPLRCT fell more than 6% last week, while semiconductor shares .SOX dropped more than 15% over the past 10 days. The selloff has been driven largely by falling valuations rather than weaker profit expectations, with the tech sector now trading at about 19.9 times forward earnings, near the lower end of its valuation range during the current bull market, according to Truist.

The recent weakness has coincided with a rotation into other corners of the equity market including energy, consumer staples and healthcare, suggesting investors are reallocating money within equities rather than abandoning risk assets altogether, the analysts said.

Still, Truist analysts contend that tech's pullback must be viewed in the context of its outsized gains. The Philadelphia Semiconductor index has gained more than 400% during this bull market, while the tech sector has gained 238%, more than double the S&P 500’s 114% return, they argued.

"The tech love-hate relationship continues, and that will likely remain a defining feature of this cycle," the analysts said. "Every spending announcement, financing development, earnings report, and demand signal is being amplified because the range of potential outcomes from the AI buildout remains unusually wide. The pullback may not be over."

(Chibuike Oguh)

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