Following a period of pullback, Wall Street's sentiment towards the artificial intelligence sector is turning optimistic again. In its latest strategy report, UBS points out that the market's previous pessimistic expectations for AI-related assets have been excessive, with recent adjustments reflecting more on fund flows and positioning changes rather than a deterioration in industry fundamentals.

With the U.S. earnings season commencing, UBS anticipates that corporate results are likely to reaffirm the high activity within the AI industry chain, driving further upward revisions to profit expectations and serving as a new catalyst for the sector's performance. Beyond AI, the healthcare sector, due to improving profit revisions and accelerating AI application penetration, is also highlighted by UBS as a key allocation area. Conversely, the consumer sector remains at the bottom of their thematic rankings due to weaker profit momentum.

Simultaneously, data from Barclays indicates that market returns remain highly concentrated in a few sectors. The proportion of stocks outperforming the S&P 500 over the past year is significantly below the historical average, reflecting that capital continues to cluster around themes with a narrative of upward profit revisions.

UBS: AI Reclaims Top Spot Among Investment Themes

According to a client report released Wednesday by a team led by UBS strategist Gerry Fowler, the bank's "Theme-o-Meter," which gauges market theme momentum, shows the AI theme has climbed back to the top position among all investment themes. This is primarily attributed to consistently improving profit expectations and a warming macroeconomic environment.

He stated, "We expect the earnings season to further reinforce the trend of upward profit revisions and continue to drive the AI theme towards outperformance."

UBS believes the recent correction in the AI sector is inconsistent with industry fundamentals, primarily influenced by factors such as summer de-leveraging, profit-taking, and portfolio rebalancing, rather than any substantive change in the industry's outlook.

Analyst Stephen Ju, who covers internet research, added that AI demand continues to outstrip infrastructure supply capacity. Capital expenditures from hyperscale cloud service providers are more likely to be revised upwards further, thereby driving additional improvements in profit expectations across the entire AI industry chain.

Healthcare Emerges as a Key Allocation Area Beyond AI

UBS has concurrently upgraded its rating on the healthcare sector. Strategists believe the cycle of profit downgrades for this sector is nearing its end, with fundamentals steadily improving, the regulatory environment stabilizing, and market sentiment recovering. UBS forecasts substantial long-term growth potential for the weight-loss drug market, strong profit resilience among large pharmaceutical firms, and a potential boost for the biotech sector from a resurgence in mergers and acquisitions and product catalysts.

At the same time, AI is accelerating its application in drug discovery, clinical development, and medical diagnostics, helping the life science tools industry exit its inventory cycle. The entire sector is entering a new phase of profit improvement.

In contrast, UBS continues to rank consumer staples and discretionary sectors as the weakest current themes, citing a lack of sustained momentum for profit upgrades. Barclays data also shows that only 37% of stocks outperformed the S&P 500 over the past 12 months, lower than the 40% in the previous quarter and the historical average over the past seven years. Market excess returns remain concentrated in a handful of themes with sustained profit improvement potential, indicating that stock performance divergence remains pronounced.