Asian technology valuations reach record highs while earnings support remains intact; shift from chasing rallies to selecting winners and adding laggards

Overview

This report presents Bernstein's joint outlook on quantitative strategy, Asian semiconductors, and Chinese internet within Asian technology for 3Q26. Its core judgment is that Asian technology has experienced a strong rally and entered a high-valuation range, but the earnings-upgrade trend has not yet exhausted itself, so a blanket bearish stance is inappropriate. A more suitable approach is to be more cautious among winners and selectively add exposure to lagging sectors. The report combines sector valuation, earnings revisions, crowding, and factor performance to propose a shift from simply chasing momentum toward a combination of value, quality, and high-quality momentum.

Core views

The report maintains a constructive view on Asian technology but believes valuation support is limited. Among strong sub-sectors, semiconductors and communications/electronic equipment still have room for earnings upgrades, although equipment stocks face high valuation risk; computer-peripheral earnings expectations are near historical extremes, so exposure should be reduced. Among lagging sub-sectors, internet, entertainment, and interactive media & services have low valuations and weak sentiment. Although earnings downgrades have not fully bottomed, extreme valuations make them worthy of gradual additions. At the stock level, semiconductor preferences focus on AI-related names and storage stocks with earnings-upgrade elasticity, including MediaTek, TSMC, Samsung, SK hynix, and Micron. In Chinese internet, the report believes Tencent's Hunyuan3 model, Alibaba's better-than-feared quarterly trend, and progress in application-layer AI could drive a near-term recovery.

Analysis framework

The report combines top-down and bottom-up methods. It first assesses 12-month forward P/E, price-to-sales ratios, relative market premiums, and historical z-scores for Asian technology overall and its sub-sectors, then examines the earnings-revision balance and crowding. It subsequently uses a factor framework covering momentum, growth, value, quality, free-cash-flow yield, and market capitalization to screen for opportunities within the sector, incorporating Bernstein's ratings and target prices for covered stocks to form allocation recommendations.

Methodology notes

• Valuation analysis12-month forward P/E and price-to-sales z-score

  Use the number of standard deviations of current valuation relative to five-year and 10-year historical averages to assess whether sectors and sub-sectors are overheated or undervalued.

  Asian technology overall has a forward P/E of 30x and a price-to-sales ratio of 5.1x, indicating historically elevated valuations; internet, entertainment, and interactive media & services are at low levels.

• Earnings revisionsEarnings Revision Balance

  Assess whether earnings expectations remain supported by comparing the relative changes in upward and downward revisions.

  The report believes Asian technology remains in an earnings-upgrade cycle, with earnings revisions relative to the market still improving. This is the main basis for maintaining a constructive view.

• Crowding analysisGlobal Crowding Deciles / 5-year percentile

  Measure the concentration of capital and trading to identify overheated momentum trades or recovery opportunities in out-of-favor sectors.

  Communications equipment, semiconductors, and electronic equipment are more crowded, while interactive media, entertainment, internet, and software are in out-of-favor areas.

• Factor strategyMomentum / Growth / Value / Quality / FCF Yield

  Compare returns, valuations, earnings revisions, and crowding across different factors within technology stocks.

  Momentum technology posted the largest gain in 1H26, but earnings expectations and crowding in high-momentum portfolios are already elevated. The report favors value and quality, while selectively retaining momentum in high-quality stocks.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• Asian technology sector

  Core covered asset

  Strengths

  The earnings-upgrade cycle remains intact, 1H26 performance was strong, and leadership from large-cap technology continues.

  Weaknesses

  Overall valuation is historically elevated, with both P/E and price-to-sales ratios significantly above long-term averages.

  Comparison

  Relative market P/E premium is 62%, above the five-year average of 40%; price-to-sales premium is 84%, above the five-year average of 33%.

  Risks

  If earnings upgrades slow, current valuation levels may prove difficult to sustain.

• Semiconductors and semiconductor equipment

  Preferred positive allocation direction

  Strengths

  AI demand and momentum remain strong, storage stocks have the greatest earnings-upgrade elasticity, and TSMC is viewed as a quality compounder.

  Weaknesses

  Valuations of some equipment names are already high, while crowding in semiconductors and communications equipment is also showing signs of increasing.

  Comparison

  Up 98% relative to the market from the beginning of 2026 to date, leading among sub-sectors.

  Risks

  Disappointment in AI demand expectations, valuation compression, and long-term competitive threats from China could affect some companies.

• Computers and peripherals

  Strong performer but exposure should be reduced

  Strengths

  Strong performance from the beginning of 2026 to date, with some companies benefiting from hardware- and AI-related demand.

  Weaknesses

  Earnings upgrades are at a record high, leaving limited room for further upward revisions.

  Comparison

  Up 95% relative to the market, second only to semiconductors.

  Risks

  If earnings expectations cannot continue to rise, valuations and expectations could decline together.

• Communications equipment and electronic equipment

  Winner sectors but valuation warrants caution

  Strengths

  Strong momentum, with some companies still having room for earnings upgrades.

  Weaknesses

  Valuations are near or at record highs on both forward P/E and price-to-sales measures; average stock crowding in electronic equipment is close to a five-year historical high.

  Comparison

  Both communications equipment and electronic equipment are up approximately 86%-87% relative to the market year to date.

  Risks

  High risk of crowded-trade reversals and valuation normalization.

• Chinese internet

  Reallocation candidate among lagging sectors

  Strengths

  Low valuation starting point; Tencent's Hunyuan3, Alibaba's better-than-feared trend, and progress in application-layer AI could improve sentiment.

  Weaknesses

  Sentiment deteriorated significantly in Q2, while debate over AI capital expenditure and returns on investment will continue.

  Comparison

  Internet is down 47% relative to the market year to date, making it one of the weakest-performing sub-sectors.

  Risks

  Macroeconomic demand, competition, returns on AI investment, and the fact that earnings downgrades may not yet have fully bottomed remain key uncertainties.

• Entertainment and interactive media services

  Low-valuation recovery candidate

  Strengths

  Valuations have fallen to low levels, and the entertainment sector shows early signs of earnings recovery.

  Weaknesses

  The sector remains broadly out of favor, and pressure from earnings downgrades has not been fully resolved.

  Comparison

  Compared with relatively strong semiconductor and equipment stocks, valuations and crowding are at the opposite extremes.

  Risks

  If confirmation of an earnings bottom is delayed, low valuations may persist for an extended period.

• Value and quality technology factors

  Factor direction preferred by the report

  Strengths

  More attractive relative valuations, lower crowding risk, and continued room for momentum to build.

  Weaknesses

  1H26 performance lagged momentum and growth.

  Comparison

  Value rose approximately 39%, while quality/high free-cash-flow yield rose approximately 38%, below the 128% gain for momentum technology.

  Risks

  If the market continues to pursue high momentum and high growth at extreme levels, value and quality may continue to underperform in the short term.

Key data

• Asian technology market-cap-weighted performance+85%Market-cap-weighted performance of Asian technology in 1H26 through the end of June 2026.
• Asian technology equal-weighted performance+40%Equal-weighted performance of Asian technology in 1H26 through the end of June 2026.
• Sector forward P/E30xThe May peak was 36x; the current level is approximately 1.8 standard deviations above the 10-year average.
• Sector price-to-sales ratio5.1xApproximately 2.9 standard deviations above the five-year average and close to technology bubble-era levels.
• Relative market P/E premium62%Above the five-year average premium of 40%.
• Relative market price-to-sales premium84%Significantly above the five-year average premium of 33%.
• Semiconductor relative market performance+98%Leading among Asian technology sub-sectors from the beginning of 2026 to date.
• Computer-peripheral relative market performance+95%Strong performance, but earnings expectations are at a record high and the report recommends reducing exposure.
• Internet relative market performance-47%The most significant laggard among major sub-sectors from the beginning of 2026 to date.
• Momentum technology factor performance+128%Strongest performance in 1H26, but trading risk and crowding have increased.
• Growth technology factor performance+69%Second only to momentum in 1H26.
• Value and quality factor performance+39% / +38%Although lagging momentum, these factors are considered more attractive to pursue going forward.

Impact & implications

For portfolios, the report does not imply exiting Asian technology altogether. Rather, it recommends reducing indiscriminate chasing of areas where valuations and crowding have risen significantly. Continued earnings upgrades support leadership from semiconductors and large-cap technology, but room for further valuation expansion is limited, making risk-reward increasingly dependent on earnings delivery. Allocation should shift from a single-factor momentum trade toward a barbell structure: retain high-quality large-cap technology and the upside elasticity of the AI/storage chain, while adding exposure to internet, entertainment, and interactive media, where valuations and sentiment are depressed.

Risks

• Overall Asian technology valuations are at historical highs, creating substantial valuation-compression risk if earnings upgrades slow.
• Momentum trading and crowding in some winning sub-sectors have increased, potentially causing significant drawdowns during a reversal.
• Communications equipment, electronic equipment, and some semiconductor equipment stocks face overvaluation risk on both P/E and price-to-sales measures.
• Although internet, entertainment, and interactive media have low valuations, earnings downgrades have not fully bottomed; low valuation does not imply an immediate reversal.
• Returns on AI capital expenditure remain debated. Insufficient monetization at the application layer could affect expectations for large-cap internet and semiconductor chains.
• Storage stocks have high earnings elasticity but also greater cyclical volatility.
• KIOXIA is rated Underperform in the report and faces long-term competitive threats from China.

What to watch

• Whether the earnings-revision balance for Asian technology continues to improve, particularly the revision trend relative to the market.
• Whether the sector forward P/E continues to fall from 30x and whether the 5.1x price-to-sales ratio undergoes further normalization.
• Whether computer-peripheral earnings expectations retreat from their record high.
• Whether crowding in semiconductors, communications equipment, and electronic equipment enters an extreme range.
• Whether earnings downgrades in internet and entertainment reach a bottom.
• The impact of Tencent's Hunyuan3, progress on the Weixin agent, and new product launches at Alibaba's Apsara conference on application-layer AI sentiment.
• Whether leadership from large-cap technology continues and whether the recovery of value and quality factors relative to momentum broadens.