Equities Can Withstand Hawkish Fed, UBS Asset Management Says

UBS Asset Management remains constructive on global stocks, asserting that a resilient economy and broadening corporate earnings provide a sufficient buffer for the bull market to withstand the prospect of higher-for-longer U.S. interest rates. The firm's latest global multi-asset outlook highlights a growing divergence between buoyant risk assets and increasingly challenged bond markets.

Economic Strength Underpins Equity Case

According to UBS, the foundation for its positive equity view is solid global economic momentum, underpinned by an improving U.S. labor market and accelerating manufacturing activity worldwide. This environment is expected to fuel continued earnings growth, which the firm sees as the primary driver for stock market gains despite potential volatility from monetary policy.

While lower oil prices may help ease headline inflation, the asset manager warned that persistent U.S. core inflation will likely keep the Federal Reserve on a hawkish path. This leaves further interest rate hikes "firmly on the table," creating a key headwind for investors to navigate.

A Divergence in Asset Classes

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The prospect of a more aggressive Fed is expected to support a stronger U.S. dollar, as other major central banks face weaker growth and are anticipated to slow their own tightening cycles. This dynamic informs UBS's strategic positioning across different asset classes.

Evan Brown, Head of Global Multi-Asset Strategy at UBS Asset Management, outlined the firm's specific views:

• Equities: The firm remains overweight stocks, with a preference for emerging markets and Japan, where its leading indicators suggest the strongest earnings growth.
• AI-Related Stocks: Brown advised that “maintaining exposure to AI-linked stocks makes sense given surging earnings growth,” but cautioned that “increased crowdedness and growing participation in leveraged single-stock ETFs highlight the need for diversification.”
• Fixed Income: UBS is cautious on U.S. Treasuries, expecting them to underperform equities. It sees better opportunities in UK and Australian government bonds, where economic growth is showing signs of slowing.