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Beyond "Big Six:" Why Choose Non-Cyclical Sector ETFs?

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UBS Global Research has revised its outlook for the "Big Six" tech companies — Apple, Amazon, Google-parent Alphabet, Meta, Microsoft, and Nvidia — from "Overweight" to "Neutral," according to a recent statement by Jonathan Golub, the chief U.S. equity strategist at UBS Investment Bank, according to a source.

In his explanation, Golub said that the downgrade is not based on rich valuations or concerns about the sustainability and momentum of the AI technology. Instead, he pointed out tough comps compared to the pandemic period and cyclical pressures as the headwinds. Golub highlighted that the rapid earnings growth recorded by these tech giants over the past year is now ebbing.

Will Easy Comps Faced by Big Tech Go Away in 2025?

UBS indicated that the pandemic initially triggered increased demand for PCs, online shopping and gaming, thus helping those tech stocks’ earnings. A reduction in costs and easy comparisons boosted these companies’ profits, which peaked in the fourth quarter of 2023. But this jump will be followed by a decline in earnings as the economy gradually gains momentum.

Golub also mentioned that the current analysis does not overlook the influence of AI, cloud computing, or bitcoin mining on tech earnings. The research division of UBS predicts a decline in these companies' EPS growth to 16% in the first quarter of 2025, down from 42% in the corresponding period of this year. UBS expects earnings to normalize going forward.

Let’s discuss some examples:

Nvidia’s expected sales growth is 17.94% for 2025 versus 74.07% for 2024. Its 2025 expected earnings growth is 13.88% versus 2024’s expectation of 84.72%.

Meta’s expected sales growth is 12.79% for 2025 versus 18.19% for 2024. Its 2025 expected earnings growth is 15.18% versus 2024’s expectation of 35.71%.

Alphabet’s expected sales growth is 11.07% for 2025 versus 13.18% for 2024. Its 2025 expected earnings growth is 14.58% versus 2024’s expectation of 16.90%.

Amazon’s expected sales growth is 11.59% for 2025 versus 11.61% for 2024. Its 2025 expected earnings growth is 30.36% versus 2024’s expectation of 41.38%.

Time for Non-Cyclical ETFs?

According to UBS, EPS growth for non-tech companies is expected to surpass that of the Big Six over the next year, as these firms were less affected by the pandemic-induced boom.

The Federal Reserve is also likely to start cutting rates in late 2024 due to the likelihood of cooling inflation. The U.S. economy is showing signs of resilience.

This perspective has bolstered investor confidence, leading to increased investments in sectors like financials and industrials. These areas are deemed safe havens amid the likely Fed rate cuts. Other sectors like consumer staples, utilities and healthcare also appear to be safe bets.

ETFs in Focus

Against this backdrop, below we highlight a few safe sector ETFs like Health Care Select Sector SPDR ETF (XLV - Free Report) , Industrial Select Sector SPDR ETF (XLI - Free Report) , Financial Select Sector SPDR ETF (XLF - Free Report) , Consumer Staples Select Sector SPDR ETF (XLP - Free Report) and iShares U.S. Utilities ETF (IDU - Free Report) .

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