RBC Capital Markets Echoes Deutsche Bank In Asking Clients To Steer Clear Of Tech In Medium Term

• RBC Capital Markets downgraded the tech sector from ‘overweight’ to ‘market weight.’
• Key chip sector exchange-traded funds (ETFs) like SOXX and SMH have dipped over 5% so far this week. 
• Market analysts and prominent investors warn that aggressive capital expenditure in artificial intelligence could eventually destroy capital.

Major Wall Street institutions are increasingly cautioning investors to scale back their exposure to technology equities amid fears that momentum in semiconductor earnings begins to wane.

RBC Capital Markets was the latest firm to downgrade the tech sector, reducing its outlook from ‘overweight’ to ‘market weight’ and advising institutional clients to reallocate capital toward health care stocks, CNBC reported. 

The shift follows similar analysis from Deutsche Bank last week, which warned that the robust rotation into technology assets that started earlier in the summer is rapidly approaching its peak.

Key semiconductor ETFs like the iShares Semiconductor ETF (SOXX) and VanEck Semiconductor ETF (SMH) have dropped above 5% so far this week and are on track to end the month in red. 

Decelerating Earnings Outlook

The main catalyst for the cautious pivot is softening sentiment around corporate earnings. While earnings-per-share (EPS) estimates for the broader technology sector remain relatively strong, analysts have observed a noticeable slowdown within the semiconductor space.

According to Lori Calvasina, head of U.S. equity strategy at RBC, tracking the deceleration rate in the Russell 3000 semiconductor index is vital. She noted that a further drop in upward revisions would serve as a clear negative performance signal, likely indicating another leg down for semiconductor equities.

Despite the recent retreat, individual memory chip manufacturers have retained substantial multi-month gains. Micron (MU) has more than doubled over the past six months, while SanDisk (SNDK) remains up over 50% across the same period.

Broadening Caution And AI Capex Risks

The recommendations to retreat from tech equities coincide with broader macroeconomic concerns about the long-term sustainability of AI infrastructure spending.

Parag Thatte, strategist at Deutsche Bank, highlighted that while a sector rotation out of tech could broaden market participation in a healthy manner, it could equally spark wider equity sell-offs if risk appetite sours.

Meanwhile, prominent market voices have also recently raised concerns about tech valuations and the future of tech sector investing. Billionaire investor Paul Tudor Jones cautioned that the stock market could face severe headwinds by 2027, citing valuations and conditions reminiscent of the late-1990s dot-com bubble.

Chris Wood, global head of equity strategy at Jefferies, expressed concern over aggressive corporate spending on AI buildouts, warning that much of the capital expenditure could ultimately be wasted if returns on investment fail to materialize.

SOXX, SMH ETF: Retail View 

Retail sentiment on Stocktwits was ‘bearish’ on SOXX but was ‘bullish’ on SMH, both with ‘high’ retail traction and message volumes. 

A user also highlighted weakness in memory chip stocks. 

SOXX ETF has gained 71% year-to-date, while SMH ETF has gained about 55%. 

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