UBS Asset Management Says Equities Can Endure Higher Interest Rates

UBS Asset Management remains constructive on global stocks, citing durable economic growth and broadening corporate earnings as key supports that can offset the risks of a more hawkish Federal Reserve. The firm's latest global multi-asset outlook highlights a growing divergence between resilient risk assets and a challenged bond market, as investors weigh strong economic data against the prospect of higher-for-longer U.S. interest rates.

Growth and Earnings Underpin Bull Case

According to UBS, the global economy is being supported by an improving U.S. labor market and accelerating manufacturing activity worldwide. This economic resilience is expected to fuel corporate profit growth, providing a fundamental tailwind for equities despite potential volatility from monetary policy.

"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 at UBS Asset Management. He added that while investors should maintain exposure to AI-related stocks due to their "surging earnings growth," diversification is crucial as the trade becomes more crowded and leveraged single-stock ETFs gain popularity.

Fed Policy and Strong Dollar Remain Headwinds

The primary risk to the market, according to the asset manager, is persistent U.S. core inflation. While lower oil prices may ease headline inflation, UBS expects underlying price pressures to stay elevated, keeping further Federal Reserve interest rate hikes on the table.

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This policy divergence is expected to support a stronger U.S. dollar. UBS argues the Fed is likely to maintain a more hawkish stance than other major central banks, which are anticipated to slow their tightening cycles amid weaker growth and different inflation dynamics.

Cautious Stance on U.S. Treasuries

Reflecting its view on Fed policy, UBS Asset Management expressed caution on U.S. government bonds. The firm expects U.S. Treasuries to underperform equities as markets increasingly price in the risk of additional rate hikes.

Instead, the firm sees better opportunities in fixed-income markets where economic growth is slowing. It specifically noted a preference for UK and Australian government bonds over their U.S. counterparts.