Equities Can Withstand Higher Rates on Strong Earnings, UBS Says

UBS Asset Management believes the bull market in equities can continue despite the risk of higher-for-longer U.S. interest rates, according to its latest global multi-asset outlook. The firm remains constructive on global stocks, arguing that resilient economic growth and expanding corporate earnings provide a strong foundation for risk assets.

Overweight Stocks, Citing Earnings Growth

UBS stated it remains overweight equities, a view supported by an improving U.S. labor market and accelerating global manufacturing activity. The firm sees this economic momentum translating into robust corporate profit growth, which can offset volatility from monetary policy uncertainty.

According to Evan Brown, Head of Global Multi-Asset Strategy at UBS Asset Management, the firm prefers emerging markets and Japan, “where our leading indicators point to the strongest earnings growth.” Brown also noted that investors should maintain exposure to AI-related stocks due to their strong earnings, but he cautioned that “increased crowdedness and growing participation in leveraged single-stock ETFs highlight the need for diversification.”

Cautious on Treasuries Amid Hawkish Fed

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While optimistic on stocks, UBS warned that persistent U.S. core inflation could keep the Federal Reserve on a hawkish path, with further interest rate hikes remaining “firmly on the table.” This outlook creates a stark divergence between equities and fixed-income markets.

The firm is cautious on U.S. Treasuries, expecting them to underperform equities as the market increasingly prices in the risk of additional Fed rate hikes. In contrast, UBS Asset Management sees better opportunities in UK and Australian government bonds, where economic growth is showing more significant signs of slowing.

Stronger U.S. Dollar Expected to Persist

The anticipated policy divergence between the U.S. and other major economies is also expected to support a stronger U.S. dollar. UBS argued that the Federal Reserve is likely to maintain a more hawkish stance than other central banks, which are expected to slow their tightening cycles in response to weaker growth and different inflation dynamics.