UBS Asset Management: Bull Market Can Withstand Higher Rates on Strong Earnings

UBS Asset Management remains constructive on global equities, asserting that the ongoing bull market can weather the headwind of potentially higher U.S. interest rates. The firm's latest global multi-asset outlook points to resilient economic growth and expanding corporate earnings as key drivers supporting risk assets.

This view highlights a growing divergence in financial markets, with equities showing strength while bond markets face challenges from the prospect of a "higher-for-longer" interest rate environment. UBS expects this dynamic to continue, with earnings growth underpinning stocks despite potential volatility from monetary policy uncertainty.

Bullish Thesis on Equities

According to the firm, a strengthening U.S. labor market and accelerating global manufacturing activity are providing a solid foundation for the global economy. Citing these factors, UBS maintains an overweight position on equities.

"We remain overweight equities and prefer emerging markets and Japan, where our leading indicators point to the strongest earnings growth," said Evan Brown, Head of Global Multi-Asset Strategy and Portfolio Management for the Americas and Asia at UBS Asset Management. Brown also noted that while exposure to artificial intelligence stocks is sensible due to surging earnings, investors should prioritize diversification as the trade becomes more crowded.

Fed Policy and Fixed Income Outlook

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Despite a positive equity outlook, UBS warns that persistent U.S. core inflation could keep the Federal Reserve on a hawkish path, leaving further interest rate hikes "firmly on the table." This monetary policy stance informs the firm's cautious view on certain fixed-income assets.

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

U.S. Dollar Strength

The asset manager also anticipates the U.S. dollar will remain strong. This forecast is based on the expectation that the Federal Reserve will likely maintain a more hawkish policy stance than other major central banks, which are expected to slow their own tightening cycles amid weaker growth.