Equities Can Withstand Higher Rates on Strong Earnings, UBS Says

UBS Asset Management believes the global equity bull market can continue its run, supported by resilient economic growth and broadening corporate earnings, even as the risk of higher-for-longer U.S. interest rates persists.

Economic Resilience Supports Earnings

In its latest global multi-asset outlook, the firm stated its overweight position on equities, citing a positive economic backdrop. UBS pointed to an improving U.S. labor market and accelerating global manufacturing activity as key drivers underpinning the global economy.

According to the asset manager, this economic momentum is expected to translate into continued earnings growth for corporations, providing a crucial support for stock valuations despite potential volatility from monetary policy.

Fed Hawkishness and Market Divergence

The primary risk to this outlook is persistent U.S. core inflation. While lower oil prices may ease headline inflation, UBS expects underlying price pressures to remain elevated, leaving further Federal Reserve interest rate hikes "firmly on the table."

Ad

This scenario is creating a growing divergence between resilient risk assets like stocks and increasingly challenged bond markets. UBS expects the U.S. dollar to remain strong, as the Fed is likely to maintain a more hawkish stance than other major central banks.

Asset Allocation Recommendations

Evan Brown, Head of Global Multi-Asset Strategy at UBS Asset Management, outlined the firm's strategic positioning, advising investors to maintain equity exposure while being mindful of risks.

Key takeaways from the firm's strategy include:

• Regional Preferences: Favoring emerging markets and Japan, where leading indicators point to the strongest earnings growth.
• AI Exposure: Maintaining positions in AI-linked stocks due to "surging earnings growth," but diversifying due to "increased crowdedness and growing participation in leveraged single-stock ETFs."
• Fixed Income: Remaining cautious on U.S. Treasuries, which are expected to underperform equities. The firm sees better opportunities in UK and Australian government bonds, where economic growth is slowing.