Amid a goldilocks economy, raging bull markets and unpredictable AI exuberance, UBS says now is the time for savvy investors to create balanced portfolios to withstand crosscurrents such as political risks that will be buffeting markets the second half of the year.
In its second-half outlook report, “Decision Time,” UBS's Chief Investment Office said it’s seeing investment opportunities across equities, fixed income and alternative assets, such as public credit and equity. Valuations in private equity, for example, have hit bottom and private credit could return “high-single to low-double returns” this year. Keeping a long-term allocation of this mix of assets will help investors position portfolios for upcoming uncertainty, the firm said in the June 20 report.
“In the second half of the year, the U.S. will decide its next president, artificial intelligence should continue to advance rapidly, and U.S. interest rates will likely be cut,” UBS said. “For investors, we expect outcomes to be driven by how these events shift expectations for 2025.”
UBS is bullish on stocks overall and particularly those associated with artificial intelligence, which the firm thinks “will prove to be one of the largest investment opportunities in human history.” Therefore, investors need to ensure their portfolios are “AI enabled,” UBS said in the report. UBS also sees potential upside for financials if there’s a “red sweep” come November, which assumes a Republican takeover of the White House and both chambers of Congress. UBS gives a 45% chance of this scenario happening.
One of the most bullish firms on Wall Street, UBS Global Research in late May lifted its price target for the Standard & Poor’s 500 Index to a then-high 5,600, which is now the average for sell-side analysts. In the meantime, the S&P continues to scale record heights, closing at 5,615 on June 12.
David Lefkowitz, head of Equities Americas at UBS Global Wealth Management, told Financial Advisor his wealth management side of UBS still sees the market at 5,500 for this year and 5,600 by June of 2025. Stronger-than-expected economic growth, for one, could push the firm’s 2024 target to 5,700.
“I don’t see a big change” in that forecast, Lefkowitz said.
Industrials, Information Tech Well-Positioned
In its earnings-per-share growth forecasts for the S&P, UBS wealth management is mainly in line with the consensus, expecting 11% gain this year and “penciling in” earnings growth of 6% next year, according to the strategist. That prediction is below the aggregate 14.5% in earnings-per-share growth analysts see for 2025.
“In our soft-landing bear case, there’s probably some upside to those numbers,” he added. “But I don’t think it’s a lot.”
Overall, in equities UBS urge investors to seek quality growth. “We recommend companies with a competitive edge, pricing power, and high barriers to entry, which are often a result of years of investment in brand equity or technological innovations,” UBS said in the report.
UBS most preferred sectors include industrials, benefiting from economic growth, and information technology, a winner from higher AI investment spending. On the other hand, the firm noted that consumer discretionary is suffering from “somewhat sluggish” consumer spending and real estate looks “slightly expensive relative to real interest rates.”
In a market note this morning, UBS said, “The backdrop for stocks remains supportive due to durable profit growth, falling inflation, and an investment boom in AI.”
Move Cash Into Fixed Income
UBS said slower economic growth and inflation data in the second half of 2024 will result in interest rate cuts by central banks. The firm advises investors to move excess cash into quality fixed income.
Wall Street expects the Federal Reserve to begin cutting rates in September after Chairman Jerome Powell told a Congressional committee last week that fighting inflation is no longer its singular focus.
“Our base case is that the Federal Reserve will make two 25-basis-point cuts this year, with the first in September,” UBS said in the report. “We then expect the Fed to follow with 100bps of further cuts in 2025, leaving rates at 3.75–4% by the end of next year.”
UBS also forecast the 10-year U.S. Treasury yield to fall to 3.85% by the end of 2024 and to 3.5% by the end of March 2025, from around 4.2% today. The firm also favors medium-duration bonds with a maturity up to 10 years. Meanwhile, longer-duration bonds are susceptible to high U.S. debt burden and loose fiscal policy.
Furthermore, UBS thinks lower rates could add to depreciation pressures on the U.S. dollar while supporting commodities. “We recommend investors sell into dollar strength and seek opportunities in various commodity markets,” said the firm.
For one, UBS lifted its stance on gold to “most preferred.” Gold prices could rise to $2,600 an ounce by the end of the year and to $2,700 by mid-2025, fueled by political uncertainty and bank buying.
Lower rates could also help select equities, and UBS sees opportunities in small- and mid-capitalization stocks and consumer equities.
Seizing The AI Opportunity
The upcoming election will infuse volatility into equities, predicts UBS. The firm noted that consumer discretionary and renewables sectors would be at risk in a “red sweep.” On the other hand, UBS favors the financial sector as it isn’t pricing in the potential for lower regulation that could result under a GOP political sweep.
As with many market bulls, UBS Chief Investment Office is betting big on AI.
“The market potential of AI is vast, and we expect AI to be a key driver of equity market returns over the coming years,” the firm said. “We think it is important that investors hold sufficient long- term exposure to AI.”
UBS sees the best opportunities in the enabling layer of the AI value chain, where annual capex could reach $331 billion by 2027, and in vertically integrated mega caps, which are well positioned across the value chain.