UBS on five reasons the equity rally has further to run
UBS's constructive stance suggests the bank sees limited near term downside for equities, with easing Hormuz-related oil risk and a patient Fed removing two of the more prominent overhangs on sentiment. The emphasis on broadening earnings, beyond the narrow group of megacap technology names, points toward potential rotation into cyclical and mid-cap names if the trend holds, which could support a wider rally rather than one concentrated purely in AI winners. Divergence within the AI trade itself, illustrated by Microsoft's cloud acceleration against Meta's sharp free cash flow decline, signals markets are becoming more discerning about which companies are actually monetising AI spending. Continued strength in ISM manufacturing data adds to the case for cyclical participation, while a steady Fed policy stance keeps the path open for risk assets so long as inflation data cooperates.
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UBS argues the equity rally is being underpinned by more than just AI hype, pointing to broadening earnings, resilient economic data and a Fed content to stay on hold.
Summary:
- UBS says progress toward reopening the Strait of Hormuz has helped lower oil prices and ease inflation concerns tied to energy
- The bank says corporate earnings continue to validate the AI investment case, though investors are becoming more selective, citing Microsoft's accelerating cloud growth against a sharp drop in Meta's free cash flow
- ISM Manufacturing PMI rose to 55.6 in July from 53.3 in June, beating expectations and marking a seventh straight month of expansion, with new orders growing and cost pressures easing
- Earnings growth is becoming more broad-based, with around 80% of S&P 500 companies beating expectations versus a historical norm of about 73%, and second-quarter EPS growth tracking at 30% or more, ahead of UBS's initial 28% estimate
- The Federal Reserve held rates steady at 3.50 to 3.75% last week, with Chair Kevin Warsh describing a period of "watchful thinking," while core CPI slowed to 2.6% in June
- UBS's base case is that the Fed stays on hold unless core inflation stalls or energy and tariff risks intensify
UBS says the drivers underpinning the current equity market rally remain firmly in place, pointing to a combination of easing geopolitical risk, resilient corporate earnings, strong economic data and a patient Federal Reserve as reasons for its constructive stance on stocks.
The bank's strategists said progress toward reopening the Strait of Hormuz, even without a finalised agreement, has helped push oil prices lower and eased investor concern that energy costs could reignite inflation pressures. That reduction in geopolitical risk premium has allowed markets to refocus on company fundamentals rather than headline driven volatility.
On earnings, UBS said corporate results continue to support the investment case for artificial intelligence, though the bank noted investors are growing more discerning about where genuine value is being created. Recent results from Palantir followed a string of hyperscaler earnings last week that UBS said helped restore confidence in the AI trade after a volatile July exposed a growing split between companies delivering returns on AI spending and those facing rising cash flow strain. Microsoft shares jumped after the company reported its fastest pace of cloud growth in four years, while Meta shares fell sharply after free cash flow dropped 91% to its lowest level since late 2022, illustrating that divide.
The bank also pointed to resilient US economic data as a supportive backdrop for a broader rally. The ISM Manufacturing PMI rose to 55.6 in July from 53.3 in June, beating expectations of 54.0 and marking a seventh consecutive month of expansion. UBS noted that output accelerated and new orders grew solidly, while cost pressures eased and strong AI-related investment helped offset the drag from import tariffs. The bank said this improving sentiment supports its view that cyclical sectors can help broaden the rally beyond technology.
UBS highlighted that earnings growth is becoming less concentrated in a small group of megacap technology stocks. Around 80% of S&P 500 companies have beaten earnings expectations this season, above the historical norm of roughly 73%, with a median earnings beat of 5.8% compared with a long run average of 3.5%. Forward guidance has also come in better than usual, and the bank now expects second-quarter earnings per share growth to reach or exceed 30% on an underlying basis, ahead of its initial 28% estimate.
Finally, UBS pointed to the Federal Reserve's patience as an important support for risk assets. The central bank held its federal funds rate steady at 3.50 to 3.75% last week, with Chair Kevin Warsh characterising the Fed's current stance as a period of watchful thinking. Core CPI inflation slowed to 2.6% in June, and labour income growth points to more moderate consumer spending ahead. UBS said these developments give the Fed scope to remain patient while assessing whether inflation is sustainably returning toward target, with its base case being that policy stays on hold unless the recent decline in core inflation stalls or energy and tariff related risks intensify.
Taken together, UBS said strong AI investment, resilient economic data, broadening earnings growth and a patient Fed continue to support its constructive view on equities.
This article was written by Eamonn Sheridan at investinglive.com.提供 MainLink：Investinglive RSS Breaking News Feed
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