UBS Asset Management Says Equities Can Withstand Higher Rates on Earnings Strength

UBS Asset Management remains constructive on global equities, asserting that a foundation of resilient economic growth and broadening corporate earnings can support the bull market even as persistent inflation may keep U.S. interest rates elevated.

In its latest global multi-asset outlook, the firm highlighted a divide between robust risk assets and more challenged bond markets, driven by the prospect of a higher-for-longer monetary policy from the Federal Reserve.

Earnings and Economy to Propel Stocks

UBS bases its positive equity outlook on strong underlying fundamentals. The firm pointed to an improving U.S. labor market and accelerating global manufacturing activity as key drivers underpinning the global economy.

While lower oil prices may ease headline inflation, UBS expects underlying U.S. inflation to remain persistent. This could keep further Federal Reserve interest rate hikes on the table, creating potential volatility but not derailing the overall positive trend for equities supported by earnings growth.

Asset Allocation Strategy

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Based on its outlook, UBS Asset Management outlined its preferred positioning across asset classes:

• Equities: The firm remains overweight global stocks. It expressed a preference for emerging markets and Japan, where its leading indicators suggest the strongest earnings growth.
• Fixed Income: Strategists are cautious on U.S. Treasuries, expecting them to underperform equities as markets price in the risk of additional Fed rate hikes. They see better opportunities in UK and Australian government bonds, where economic growth is slowing.
• Currencies: The U.S. dollar is expected to remain strong, as UBS argues the Fed will likely maintain a more hawkish stance than other major central banks.

Navigating the AI Sector

Evan Brown, Head of Global Multi-Asset Strategy and Portfolio Management for the Americas and Asia at UBS Asset Management, noted the importance of artificial intelligence-related stocks while cautioning investors.

“Maintaining exposure to AI-linked stocks makes sense given surging earnings growth, but increased crowdedness and growing participation in leveraged single-stock ETFs highlight the need for diversification," Brown stated. This suggests investors should balance participation in the high-growth theme with broader portfolio management principles.