Transformational Innovation Opportunities (TRIO)

18 September 2026, 12:10 UTC Chief Investment Office GWM Investment Research

AI quick pulse: Will higher rates bring the technology cycle to an end? Transformational Innovation Opportunities (TRIO): Artificial Intelligence Authors: Ulrike Hoffmann-Burchardi, Chief Investment Officer Americas and Global Head of Equities, UBS Financial Services Inc. (UBS FS); Delwin Kurnia Limas, CFA, CIO Equity Strategist, UBS AG Singapore Branch; Kevin Dennean, CFA, CIO Equity Strategist, US Technology & Telecom, UBS Financial Services Inc. (UBS FS); Achille Monnet, CIO Equity Analyst, UBS Switzerland AG; Arafat Alafate, CIO Equity Strategist, UBS AG Hong Kong Branch; Nikolaos Fostieris, Global Equity Strategist, UBS Switzerland AG; Xueqiong Huang, Equity Strategist, UBS AG Singapore Branch

• Historically, the start of a Fed hiking cycle alone has not been sufficient to end a bull market or derail technology performance. What has mattered most is the interaction between interest rates, economic growth, and corporate earnings. Past tightening cycles show that technology stocks can perform well when earnings remain strong, but struggle when higher rates coincide with deteriorating profit growth.

• We believe the current environment is more similar to the constructive 2016 to 2017 period than the disruption experienced in 2022. Earnings growth remains robust, AI infrastructure economics continue to be attractive, and the expected tightening cycle appears relatively modest. Source: Shutterstock While higher long-term yields warrant monitoring, especially if the pace accelerates, current return spreads remain supportive of ongoing AI investment.

• From a portfolio perspective, we continue to favor a barbell approach within technology. We prefer high-quality semiconductor and hardware leaders, the "Magnificent 7," and select infrastructure software and defensive technology companies. At the same time, we are more cautious on richly valued areas with limited profitability and highly leveraged neocloud providers, where rising funding costs could create greater downside risk.

Our view Fig. 1: Stocks usually rise after Fed starts to hike Average S&P 500 price change after first Fed rate hike, 16 observations, indexed, since 1954 Tighter Federl Reserve policy is often viewed as a headwind for stocks. However, history suggests the first rate hike is rarely a decisive turning point. As highlighted in our recent CIO report, "US equities: Fed hikes: A shift, not a sea change," published on 15 September, US equities have delivered an average return of 10.8% in the 12 months following the start of a hiking cycle, with none of those periods leading to a bear market.

Source: Bloomberg, UBS, as of September 2026 This report has been prepared by UBS Financial Services Inc. (UBS FS), UBS AG Singapore Branch, UBS Switzerland AG, UBS AG Hong Kong Branch. Analyst certification and required disclosures begin on page 4. UBSFS accepts responsibility for the contents of this report. U.S. persons who receive this report and wish to effect any transactions in any security discussed in this report should do so with UBSFS and not UBS AG. Page 1 of 10

Transformational Innovation Opportunities (TRIO): Artificial Intelligence

Fig. 3: Tech has historically withstood modest rate hikes amid healthy growth What has mattered more is the combination of policy Nasdaq 100 performance six months after initial rate hikes: earnings tightening, economic growth, and corporate earnings. growth vs. cumulative fed funds rate increases When growth and profits remain healthy, equities have generally been able to withstand higher rates. Conversely, periods of weak growth have tended to weigh on markets regardless of the path of interest rates.

Fig.2: Equity market performance correlated with growth metrics12-month change in S&P 500 and ISM Manufacturing New Orders Index after first Fed rate hike

Source: Factset, UBS as of 2026

The recent rise in US Treasury yields has not been confined to the front end of the curve. Long-dated rates, particularly the US 10-year Treasury yield, have also moved meaningfully higher. This matters for tech investors because hyperscalers continue to accelerate data center…