Nvidia-fueled tech rally to slow, but sun isn't setting on AI theme anytime soon

Investing.com -- The Nvidia-fueled tech rally is likely to slow and turn volatile as economic headwinds and chip regulation weigh, but the sun isn't likely to set on the AI theme anytime soon.   

"Future gains in global tech stocks should be more gradual after the quick rebound over the past three weeks, with potential headwinds from US macroeconomic data and further news on semiconductor export controls likely contributing to rising volatility," UBS said in a recent note following a slump in Nvidia. 

NVIDIA Corporation (NASDAQ:NVDA), a key player in the AI sector, fell 6.4% on Thursday despite reporting a 122% year-over-year increase in revenue to $30 billion, driven by a 154% rise in data center revenue. The slump suggest that investor enthusiasm may be cooling due to "heightened expectations," the analysts said.

But while the pace of the tech rally is expected cool, the sun isn't setting on broader AI theme as enterprise spending on this emerging is likely to remain strong.    

Big tech companies are on track to increase their capital spending by 43% year-over-year, with leaders like Alphabet (NASDAQ:GOOGL) and Microsoft (NASDAQ:MSFT) underscoring their commitment to AI investments.

Alphabet CEO Sundar Pichai noted that "the risk of underinvesting is dramatically greater than the risk of overinvesting."

It isn't just big tech that set to spend big on AI. Walmart (NYSE:WMT)'s CEO Doug McMillon recently noted that “the use cases for this technology are wide-ranging and affect nearly all parts of our business,” adding that the company would “continue to experiment and deploy AI and generative AI applications globally.”

Against the backdrop of still growing AI appetite, UBS recommends investors with low existing AI holdings consider increasing long-term exposure, while those with high allocations could benefit from  exploring capital preservation strategies as a hedge.

"We continue to hold a positive structural view on the broader AI theme, and see ways investors can manage their exposure to the technology that we think is set to drive growth in the years to come," UBS added.