This Wall Street 'theme-o-meter' has a clear message: The artificial-intelligence bull market is back

By Barbara Kollmeyer

UBS strategists say investors grew too pessimistic on AI and flag another recently struggling stock-market sector as an attractive complement

UBS says investors have gotten too pessimistic about the artificial-intelligence theme and earnings could prove it.

As earnings season gets underway, festering worries about artificial-intelligence stocks could be put to bed.

So it seems based on UBS's "theme-o-meter," which gauges which market themes are rising to the top and the ones sinking to the bottom. Strategists identify themes based on a quantitative formula, evaluating macroeconomic regimes, earnings, valuation and sentiment.

"AI themes have moved back to the top of the rankings, supported by strong earnings revisions and favorable macro regime signals. We expect earnings season to reinforce the upgrades driving outperformance," a team of strategists led by Gerry Fowler told clients in a note on Wednesday.

To Fowler and the team, investors were dismissing the group's fundamental strength.

"The recent weakness in many AI-linked stocks appears inconsistent with the underlying fundamentals picture. In our view, some of the underperformance reflects summer deleveraging, profit-taking and positioning adjustments rather than a material deterioration in the outlook," they said.

UBS analyst Stephen Ju is of the opinion that hyperscaler capital-expenditure expectations will be revised up rather than down, as AI demand continues to exceed infrastructure capacity. He expects the broader AI supply chain will benefit, keeping earnings revisions more positive for longer, he said.

Those upward earnings revisions could be seen across chips, memory, power and infrastructure beneficiaries - particularly in Europe. The European AI enablement, electrification and renewables themes are "screening among the strongest opportunities in our framework, and, in several areas, are now as attractive as - or more attractive than - equivalent U.S. themes," said the strategists.

Another rising theme is healthcare XLV, which the strategists say is an attractive complement to AI.

Fowler and his team see the revision cycle for healthcare starting to turn after spending much of 2025 as one of the biggest sources of earnings downgrades. "We moved overweight on the sector well before the inflection became visible in consensus estimates, arguing that the downgrade cycle was close to exhaustion," they said.

The strategists said fundamentals are improving, the regulatory backdrop is stabilizing and stronger sentiment is helping to stabilize earnings expectations across parts of the sector.

Global obesity is one major growth story across global equities, and the UBS analysts expect "substantial growth" in GLP-1 adoption through the decade's end, they revealed, with Eli Lilly (LLY) and Novo Nordisk (NVO) seen as the biggest beneficiaries.

Beyond obesity, they see opportunity for large-cap pharmaceuticals, which continue to generate resilient earnings growth even amid patent-expiry worries. The biotech group IBB is benefiting from resurgent M&A activity and a "richer pipeline" of potential catalysts through drug trials and other events.

Healthcare is also "increasingly becoming an AI beneficiary in its own right," observed the UBS team. "AI-driven drug discovery, clinical development and diagnostics are beginning to improve productivity across the sector, while life science tools appear to be emerging from a multiyear destocking cycle."

With improved access to capital, increasing FDA approvals and rising deal activity, "the backdrop increasingly resembles the early stages of a new earnings cycle rather than the later stages of the last one," the strategists said.

As for the weakest themes, UBS flagged the consumer-staples and consumer-discretionary sectors, citing macroeconomic worries and insufficiently positive earnings revisions.

Using a quantitative-plus-fundamental framework to pick stocks, these names came out at the top of a UBS screen: Iberdrola (ES:IBE), Infineon (XE:IFX), SSE (UK:SSE), Talen Energy (TLN), Alphabet (GOOGL), Prysmian (IT:PRY), VAT Group (CH:VACN), Broadcom (AVGO) and Halma (UK:HLMA).

The markets

U.S. stocks SPX DJIA COMP are higher, with tech in the lead, extending gains from Tuesday's performance after consumer-price-index data.

 
Key asset performance                                                Last       5d      1m      YTD     1y 
S&P 500                                                              7543.59    0.53%   0.43%   10.20%  20.82% 
Nasdaq Composite                                                     26,107.01  1.12%   -1.02%  12.33%  26.26% 
10-year Treasury                                                     4.61       3.30    11.00   43.80   14.70 
Gold                                                                 4036       -1.24%  -5.62%  -6.84%  20.33% 
Oil                                                                  80.24      7.33%   6.97%   39.77%  20.43% 
Data: MarketWatch. Treasury yields change expressed in basis points 

The buzz

PayPal (PYPL) reportedly gets $53 billion buyout offer from payments group Stripe and private-equity firm Advent.

Dutch chip-equipment giant ASML (ASML) lifted its full-year sales forecast due to AI demand.

BlackRock (BLK) said assets under management topped $15 trillion and shares are climbing. Morgan Stanley stock (MS) is up after blowout earnings.

Producer prices fell 0.3% in June, versus expectations for no change, while the Empire State manufacturing index jumped by more than forecast to 15.6.

Federal Reserve Chairman Kevin Warsh gives his second day of testimony to Congress starting at 10 a.m. New York Fed president, John Williams reportedly said he sees signs inflation has peaked.

Fed Reserve governor Lisa Cook will speak at 1 p.m., and the release of the Fed's beige book is due at 2 p.m.

China's second-quarter growth was the weakest since 2022, with exports surging but a domestic economy stumbling.

What IBM's profit warning means: that hardware is 'eating everyone's lunch'

The chart

The chart from Barclays shows far fewer individual companies beating the S&P 500 over the past 12 months, which the bank calculates at 37%. Strategists led by Venu Krishna say that's slightly worse than the 40% of companies that beat last quarter but "well below historical norms over the past seven years." Around 2023, as the chart shows, that beat rate was nearing 65%.

Top tickers

These were the most searched ticker symbols on MarketWatch as of 6 a.m.:

 
Ticker  Security name 
NVDA    Nvidia 
MU      Micron 
SPCX    SpaceX 
TSLA    Tesla 
IBM     IBM 
TSM     Taiwan Semiconductor Manufacturing 
AMD     Advanced Micro Devices 
PYPL    PayPal 
AAPL    Apple 
MSFT    Microsoft 

Sold for $50.1 million - the priciest-ever dinosaur.

-Barbara Kollmeyer

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07-15-26 0940ET

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