UBS Says Strong Earnings Can Propel Equities Despite Higher Rate Risk

UBS Asset Management maintains a positive outlook on global equities, citing a foundation of resilient economic growth and expanding corporate earnings that it believes can support the ongoing bull market even as U.S. interest rates may remain elevated.

In its latest global multi-asset outlook, the firm highlighted a divide between strong risk assets and challenged bond markets, as investors weigh solid economic momentum against the prospect of a hawkish Federal Reserve.

Economic Resilience vs. Inflation Risks

UBS points to several factors underpinning its constructive stance on the global economy and, by extension, equities. The firm noted that an improving U.S. labor market and accelerating global manufacturing activity are providing a solid base for growth.

However, it also warned that while lower oil prices may temper headline inflation, persistent U.S. core inflation could keep the Federal Reserve on a hawkish path. This leaves the possibility of further interest rate hikes on the table, creating potential volatility and supporting a stronger U.S. dollar.

Asset Allocation Strategy

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Evan Brown, Head of Global Multi-Asset Strategy at UBS Asset Management, outlined the firm's specific positioning. UBS remains overweight equities, with a preference for emerging markets and Japan, where its leading indicators suggest the strongest earnings growth.

"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.

Fixed Income and Currencies

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

Consistent with its view on Fed policy, UBS also expects the U.S. dollar to remain strong. It argues the Fed is likely to maintain a more hawkish stance than other major central banks, which are expected to slow their own tightening cycles.