UBS: AI and Semiconductor Sell-Off Nears End, Advises Investors to Gradually Rebuild Positions

UBS's trading division has released a new research report indicating that the recent sharp decline in momentum stocks may be nearing its end, creating a favorable opportunity for investors to rebuild their positions in AI and semiconductor stocks.

According to UBS prime brokerage data, hedge funds have recently begun aggressively unwinding their long positions in momentum and semiconductor stocks, reducing their holdings by approximately 5% of total market value—one of the largest drawdowns in history. This adjustment has brought net holdings in semiconductor and software stocks back to April 2024 levels.

Michael Romano, Head of Hedge Fund Equity Derivatives Sales at UBS, emphasized in a client report that despite the market pullback, the continued improvement in AI fundamentals still provides a solid rationale for 'buying the dip.'

Romano advises investors to adopt a 'gradual position-building' strategy rather than making a full-scale, one-time purchase.

He wrote in the report: 'Momentum derisking has been and remains my core view—gradual entry is the prudent approach.'

UBS's momentum stock portfolio includes Broadcom, Microsoft, Oracle, SanDisk, and KKR.

However, UBS also warns that a potential rebound in AI and momentum stocks could coincide with a pullback in recently outperforming market leaders.

Data shows that recent buying in banks, industrials, and other cyclical stocks has primarily come from short covering rather than new long positioning. This suggests that as capital rotates back into AI-related names, these sectors may face downward pressure. The market is closely watching this style shift driven by capital reallocation.