Name: Earnings strength of AI companies will continue, says strategist
Uploaded: 2026-01-07T18:29:44.585Z
Duration: 3 min
Description: Bhanu Baweja, chief strategist at UBS, discusses his outlook for markets and technology stocks in 2026.

Bhanu Baweja, chief strategist at UBS, discusses his outlook for markets and technology stocks in 2026.

The release of Open AI's ChatGPT has accelerated the development of artificial intelligence and warnings about its impact on society.

Rise of AI

A market strategist has stated that while AI companies are expected to maintain strong earnings, the rapid returns seen in 2024 and 2025 will be difficult to replicate in the coming years. The strategist emphasized that although AI remains transformational, the focus for 2026 will shift to the profitability and margin sustainability of these companies.

The analyst also expressed skepticism about the narrative that broader market sectors, such as small caps and value stocks, will outperform. Concerns were raised about potential economic headwinds, including tariffs and inflation, which could impact US consumer spending and slow overall economic growth.

Earnings strength of AI companies will continue, says strategist

So, I think equities will do okay. I think returns are going to slow, right, because the kind of returns we've seen in 2024, 2025, somewhere between 15% to 20% annualized, I think that's going to be much harder. 75% if you're looking at South Korea. Indeed, indeed. I mean, both Korea and Taiwan have done extremely well, but that's, you know, it's a derivative of the AI trade. Those kind of returns, I think, are going to be much harder, because as much as I think everybody will agree that AI is transformational, the question I think for 2026 is going to be whether AI is profitable, right, whether these companies can maintain these margins. For me personally, I think one of the big surprises of 2025 was that DeepSeek had no impact on the markets, just the size of the pie was increasing so much, the capex from AI was increasing so much, and that the distribution of the pie didn't matter. I think it will matter in 2026. I think it will matter in 2027. That doesn't mean that the earnings of these companies are going to collapse. I think the earnings are very strong, and that's very different from 1999. You know, this is not a bubble. A bubble implies 50 to 80% downside. So if we talk about how returns slow from here, that suggests some of the mightiest stocks stateside are not going to perform this year, because they have such a big weight on the index. We've already heard there's been more of a diversification trade coming through, so that has bolstered other areas of the US market. But if we're looking at the entirety of this year, it suggests that the likes of Nvidia, Alphabet, these stocks are not going to grow from here very much more, but we keep hearing about the innovations and what they're doing in terms of the revenue side, Nvidia talking about cracking the China market more now. Are you underrating the performance of the magazine? So I think their earnings are going to be still very strong this year. The question is whether their valuations are the way they did this year. Both earnings and valuations gave you incremental upside. I think valuations will take away from performance this year. So more than 100% of the performance is going to come from earnings, particularly for tech. I think tech earnings are nonetheless going to slow compared to where they were in 2024 and 2025, and therefore performance is going to slow. What I'm a little bit more worried about is this broadening trade that the market is now on, which is saying low quality companies, small cap companies are doing better, or the value trade is doing better than the quality trade. That I'm not sure I completely agree with. I think it's what I'm more worried about in a sense is the 493 more than the MAX 7. I think the MAX 7 will slow. I think returns in MAX 7 will slow. But this idea that the rest of the economy can then power along and there'll be a big broadening of growth, I think that's the trade after the trade. Right now we've actually got to think about the US economy slowing down in the next couple of quarters because of things that we completely forgot about last year, which is things like tariffs leading to higher inflation, leading to real disposable income coming lower and hurting the US consumer. I think that the market is not thinking about. They're thinking about the fiscal largesse leading to much higher gains for industrials, for financials, for energy companies and for low quality companies. I think it's a bit early for that.

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Earnings strength of AI companies will continue, says strategist

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Rise of AI