2 Reasons to Wait to Pile Into the Resurgent Tech Stock Trade: SocGen

Tech stocks are again the market’s hottest trade — but Société Générale’s Chief US Equity Strategist, Manish Kabra, says not so fast.

The AI scare trade sent tech stocks plummeting earlier this year, bringing valuations in the sector down to historically cheap levels relative to the broader market. The sell-off prompted strategists around Wall Street to urge investors to jump back into the trade, given the cheaper entry point.

The sector has indeed surged, with the State Street Technology Select Sector SPDR ETF (XLK) up 18% since March 30 and the Nasdaq hitting fresh all-time highs this week.

But, as Kabra sees it, there will be safer entry points ahead — likely at the start of 2027.

In an interview with Business Insider on Wednesday, Kabra pointed to two metrics for hypescalers — the giants of the tech sector that are pursuing grand AI ambitions — that he’s watching to give him the buy signal. Both are related to hyperscalers’ investments in and monetization of AI.

The first is free cash flow levels. Right now, hyperscalers’ free cash flow has been declining every quarter since early 2024 as they continue to dump money into the AI buildout. Société Générale classifies the following companies as hyperscalers: Amazon, Alphabet, Meta, Microsoft, Alibaba, Tencent, Oracle, Baidu, IBM, CoreWeave, Nebius, Salesforce, China Mobile, China Telecom, and China Unicorn.

Kabra thinks these firms’ aggregate free cash flow levels will dip into the negative by the end of this year before heading back into the positive in early 2027.

High free cash flow levels are often associated with so-called quality stocks, as they signal a healthy balance sheet.

“That needs to inflect on the positive side, and in all my work, I don’t see that in 2026,” Kabra said. “So I think it’s very good valuations have done what they’re supposed to do, and they’re looking very attractive, but to go substantially overweight tech, we need free cash flow inflection.”

He added: “The moment that happens, the tape would be very, very bullish on the tech sector.”

Relatedly, the second measure Kabra is watching is hyperscalers’ capex-to-sales ratio. Hyperscalers have been shoveling money into things like data centers for several years now — Meta, Amazon, Alphabet, and Meta are expected to spend around $600 billion on AI this year, almost double what they did in 2025.

Last year, investors started to grow impatient about the spending spree, wanting to see a more concrete path to monetizing the investment in AI.

Kabra says he wants to see such progress, too, before overweighting the sector, and thinks that will come in Q1 2027.

“I think that that’s a key signal to monitor,” he said, “like the most important signal.”

Given Kabra’s reservations about tech stocks for the rest of this year, he said the S&P 500 would likely have a tough time breaking above 7,000, as the sector accounts for roughly 32% of the cap-weighted index.

That said, the equal-weighted S&P 500 is a better bet right now for broad market exposure, he said, as it’s more skewed to companies in the materials, industrials, and utilities sectors that should continue to benefit from high power demand in the US.

“It’s the, it’s the closest proxy to nominal growth that the US has today,” he said of the S&P 500 equal-weighted index.

One fund offering exposure to the equal-weighted index is the Invesco S&P 500 Equal Weight ETF (RSP).