UBS Sees Higher S&P 500 Volatility as AI Trade Enters a New Phase

UBS believes higher volatility in the AI trade is likely to be the new normal for the S&P 500, as investors shift their focus from spending commitments to monetization and returns.

The bank said in its CIO daily update note on Monday that it expects AI investment to remain a positive driver of equity returns in 2027.

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UBS’s Chief Investment Office raised its aggregate AI capex forecasts to $1.0 trillion for 2026 and $1.4 trillion for 2027, and it introduced a $1.5 trillion forecast for 2028, citing stronger spending commitments from the largest hyperscalers.

“Nonetheless, while we do continue to believe the broader trend remains intact, the bar for performance is rising and higher volatility in the AI trade is likely to be the new normal in this stage of the cycle,” the bank wrote.

UBS noted that cloud growth, a key measure of returns on AI investment, remains strong across Alphabet, Microsoft and Oracle. It also said neoclouds account for only about 8% of its capex estimate, compared with 80% for the largest hyperscalers.

“We therefore think select project delays, repricing, and consolidation are more likely than a broad collapse in AI spending,” UBS said.

The bank explained that it would grow concerned if AI lab revenue growth slowed meaningfully, cloud utilization weakened, or falling AI costs failed to stimulate enough new usage to absorb expanding capacity.

UBS advised investors to reduce overconcentration and diversify across the AI value chain, favoring foundry, compute and power. It also recommended rebalancing toward industrials, health care and financials, as well as the eurozone, emerging markets and Asia ex-Japan.

The bank added that high-quality bonds are once again serving as a portfolio stabilizer, and that investors should use market swings deliberately to rebalance or build exposure gradually.