JP Morgan believes the three-month stall in technology shares has gone far enough, and that investors should start buying back into the sector.
Mislav Matejka, the bank's head of equity strategy, said the broad tech and artificial intelligence (AI) trade had gone nowhere from June until last week.
He argued that valuations in most areas had fallen sharply, a process known as de-rating, and that positioning was now much less crowded.
Spending on AI infrastructure should also hold up despite recent headlines about a slowdown, he said, while earnings remain strong and companies are finding more ways to make money from the technology.
No return to the glory days
Matejka stressed that he did not expect tech to repeat its past run of extreme outperformance.
He had called for an unwinding of the sector's momentum in the summer, when investors were heavily concentrated in the trade.
He is sceptical that reports of a slowdown in frontier AI models will amount to much, describing the race as existential, with the winner taking all.
Chips over software
The strategist favours chipmakers over software companies, and said investors should reopen a trade betting on semiconductors outperforming software.
Software shares rallied sharply against chip stocks two weeks ago on the AI slowdown news.
Yet since June, forward earnings estimates for semiconductor companies have risen by 30%, while software has seen almost no uplift.
Strength in chips should also help South Korea and, indirectly, emerging markets, he added.
Matejka warned that software profitability would keep being questioned because of the risk of AI replacing its products, but said the sector was too cheap to bet against outright.
Big tech looks cheap
The Magnificent Seven, the largest US technology stocks, now trade at their lowest valuations in ten years.
Matejka said heavier borrowing and falling free cash flow justified some decline in their share prices relative to earnings, but much of that adjustment had already happened.
