Key Takeaways:
Hedge funds cut semiconductor long positions by roughly 5 percent of gross in the largest de-risking on record, but UBS says the sell-off has run its course.
The recent pullback in semiconductor stocks may have created entry points for investors willing to look beyond short-term volatility, with UBS recommending a phased re-entry into AI-related names after what it called a historic de-risking by hedge funds.
"Reducing momentum exposure was, and remains, a strategy we strongly favored — but phased re-entry is the prudent approach now," Michael Romano, head of equity derivatives sales at UBS, said in a client note.
Hedge funds trimmed momentum and semiconductor long positions by roughly 5 percent of gross, one of the largest reductions on record, bringing net exposure back to April levels. The UBS momentum basket — which includes Broadcom, Oracle, Datadog, Microsoft and Sandisk — saw a dramatic intraday reversal on the prior Friday, swinging from minus 3.5 percent to plus 2.5 percent in two hours. The bank's software basket has already rallied about 20 percent since late June, signaling that positioning-driven rebounds can materialize quickly.
The rotation back into AI stocks could come at the expense of recent winners. UBS data shows that buying in banks, industrials and other cyclical sectors has been driven primarily by short-covering rather than new long positions, leaving those groups vulnerable if capital flows shift back to technology.
UBS screened for technology stocks that have sold off since late June but continue to show improving fundamentals under its proprietary HOLT framework, which measures cash-flow return trends and valuation upside.
Micron Technology has fallen about 30 percent since June 22, making it one of the hardest-hit names in the sell-off. Yet the memory chipmaker's revenue reached $41.46 billion in the fiscal third quarter ended May 28, a jump from $9.3 billion a year earlier. "Micron is investing at record levels in technology, products and supply to address our customers' rapidly growing demand," Chairman and Chief Executive Officer Sanjay Mehrotra said in June. The company has been locking in multiyear deals, including an agreement to support Ford's next-generation vehicles.
Broadcom has held up better than most peers, slipping about 5 percent since June 22 while remaining 25 percent below its 52-week high. Revenue grew 48 percent to $2.19 billion year over year in the second quarter ended May 3, with AI semiconductor revenue surging 143 percent to $10.8 billion. "The momentum continues and in Q3 we expect semiconductor revenue from AI to grow over 200 percent year-over-year to $16 billion," President and Chief Executive Officer Hock Tan said. The company expanded its multiyear partnership with Meta to develop custom AI accelerator chips.
Advanced Micro Devices fell about 10 percent since June 22. Data center segment revenue reached $5.8 billion in the first quarter, up 57 percent year over year, driven by demand for EPYC processors and Instinct AI GPU shipments. Chief Executive Officer Lisa Su said server growth was expected to accelerate "meaningfully" as the company scales supply. Microsoft said it would deploy AMD's Helios rack-scale AI systems at its Azure data centers for inference workloads.
The UBS recommendation signals that institutional investors may begin rebuilding AI exposure in the coming weeks. The bank's momentum indicator suggested the sell-off could bottom by the end of July — or may have already found a floor. Romano warned that any reversal could be sharp and liquidity-driven, given how quickly positioning has shifted.
For investors, the key question is whether the fundamental AI demand story remains intact. UBS's analysis suggests it does: the companies that passed its HOLT screen continue to show improving cash-flow returns despite the price declines. If the rotation materializes, the recent laggards in cyclical sectors — where rallies were fueled by short-covering rather than conviction — could face selling pressure as capital rotates back into technology.
This article is for informational purposes only and does not constitute investment advice.
