Global Equities Can Withstand Higher Rates on Strong Earnings, UBS Says

UBS Asset Management remains positive on the outlook for global equities, citing a foundation of resilient economic growth and expanding corporate earnings that can help markets navigate potential volatility from higher U.S. interest rates. The firm's latest multi-asset outlook highlights a growing divergence between strong risk assets and a more challenged bond market.

Economic Resilience Underpins Equity Case

According to the asset manager, the global economy is being supported by an improving U.S. labor market and an acceleration in worldwide manufacturing activity. These factors are expected to fuel continued earnings growth, providing a key support for stock valuations even as monetary policy remains a source of uncertainty.

While lower oil prices may help reduce headline inflation, UBS expects underlying U.S. core inflation to stay elevated. This persistence could keep further Federal Reserve interest rate hikes on the table, a key risk that investors are weighing against the strong economic momentum.

Strategic Asset Allocation

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In its report, UBS detailed its current investment positioning, which reflects this complex environment. Evan Brown, Head of Global Multi-Asset Strategy for the Americas and Asia, outlined the firm's preferences:

• Equities: The firm is overweight equities, with a preference for emerging markets and Japan, where its leading indicators suggest the strongest earnings growth.
• AI Stocks: Brown advised maintaining exposure to artificial intelligence-related stocks due to their "surging earnings growth," but stressed the need for diversification as the trade becomes more crowded and involves leveraged single-stock ETFs.
• Fixed Income: UBS is cautious on U.S. Treasuries, expecting them to underperform equities as the market prices in a higher probability of additional Fed rate hikes. It sees better opportunities in UK and Australian government bonds, where economic growth is slowing.

Strong Dollar and Fed Policy

The firm anticipates the U.S. dollar will remain strong, arguing the Federal Reserve is likely to maintain a more hawkish policy stance than other major central banks. Many other economies are facing weaker growth and inflation dynamics that are more directly tied to energy prices, which could lead their central banks to slow their tightening cycles sooner than the Fed.