Ahead of the curve with Ulrike Hoffmann-Burchardi
The desk interprets Ulrike Hoffmann-Burchardi's insights to suggest a robust outlook for equities driven by key macroeconomic factors and transformational innovation like AI. Per the full note, Hoffmann-Burchardi emphasizes that a substantial portion of the S&P 500 gains—over two-thirds—can be attributed to AI advancements, highlighting the importance of this sector in the broader market context. This focus on AI, combined with a stable macroeconomic backdrop, supports an optimistic trading environment for U.S. assets despite recent political turbulence surrounding the Fed. Current themes in fiscal credibility and policy continuity could bolster investor confidence moving forward.
What the desk is arguing
The desk sees a strong bullish sentiment towards U.S. equities, particularly influenced by advancements in AI, as articulated by Hoffmann-Burchardi. With insights that over two-thirds of S&P 500 gains result from AI, there is a compelling rationale for traders to focus on sectors benefitting from technological transformation.
Additionally, the commentary downplays the significance of political narratives surrounding Jerome Powell's position as Fed Chair, indicating that a change could undermine institutional credibility and adversely affect U.S. Treasury demand. This reinforces a broader belief in the resilience of U.S. financial markets despite challenges.
Where it sits in our coverage
Our consensus target for USD/EUR stands at 1.075, with a range between 1.04 and 1.12 as we navigate through market fluctuations. Firm targets from peers are as follows: - jpmorgan: 1.10 (Mar26) - bofa: 1.04 (Mar26)
The desk's bullish outlook aligns with jpmorgan but contrasts with bofa, which is at the lower bound of the range, indicating divergence based on differing views on macro stabilization.
How other firms see it
Aligned views in the market reflect confidence in AI and its potential to drive market instruments, with firms like jpmorgan supporting this optimistic ethic. Conversely, firms like bofa hold a more cautious stance, implying a potential for downward pressure on the USD/EUR pair if economic indicators turn unfavorable.
Traders should consider how indicators of fiscal policy and ongoing AI developments could impact USD/EUR dynamics, as sentiment is poised to shift with economic releases and central bank communications.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01AI developments are a significant driver of recent S&P 500 gains, suggesting a market trend that traders should harness.
- 02Political discourse around the Fed Chair's tenure is unlikely to disrupt market stability significantly, bolstering confidence in U.S. assets.
- 03Consensus targets reflect a bullish outlook on the USD, with a notable divergence among firms regarding levels and expectations.
Market implications
Traders should monitor the performance of AI-related equities as driving forces in the S&P 500 while also keeping an eye on macroeconomic indicators that may signal shifts in Fed policy or fiscal credibility. Look for technical levels near 1.075 in USD/EUR as potential breakout points informed by broader market trends.
Risks to this view
A significant shift in U.S. political landscape or unexpected monetary policy changes could undermine confidence in market stability, particularly if Jerome Powell were to leave his position as Fed Chair. Additionally, any adverse developments in AI profitability could shift sentiment rapidly.
Hello, and welcome to Ahead of the Curve, where we look at the most important market drivers for this coming week and for opportunities beyond the consensus. My name is Ulrike Hoffmann-Borchati, CIO Americas and Head of Global Equities for UBS Wealth Management. Three things drive asset prices in our view, the macro, bottom-up fundamentals, and transformational innovation.
Earnings reports next week will tell us more about one transformational innovation, and that is artificial intelligence. One measure of just how important AI has been to the equity markets is how much it has contributed to the performance of the S&P 500 since the launch of Chats GPT. It turns out that more than two-thirds of the gains in the S&P 500 are coming from AI.
And this is based on the return contributions from companies that are and have been part of our UBS CIO AI portfolio. So before we preview the earnings reports from Google and IBM, let me share some takes on the macro landscape. There was a lot of talk again about President Trump dismissing Jerome Powell as Fed Chair last week.
We think this is highly unlikely. This would essentially question the independence of the Fed and would undermine the credibility of U.S. institutions. It would make investors vary about purchasing U.S. assets, in particular U.S.
Treasuries, which are needed to fund the budget deficit. We recently published a note on the fiscal tightrope that the U.S. is walking. Drawing on economic theory, we highlighted that the credibility of institutions is key to successfully overcoming a high budget deficit.
So while the rumors of an early departure of Jerome Powell may be continuing, we think it would be detrimental to U.S. financial markets and hence is very unlikely. On the trade policy side, the tariff noise continues. We have consistently recommended to see through the back and forth of the tariff negotiations and to buy equities on tariff dips.
We still forecast that effective tariffs will settle around 15% by the end of the year. One emerging risk on our radar is that the administration could see the strong stock market performance as a parameter for its trade policy success. And hence push for more and more concession, extending negotiation timelines further.
The European Union, one of the largest trading partners of the U.S., is a case in point. And we also heard Treasury Secretary Besant talk about the timeline for a deal with China possibly shifting further out. This means more uncertainty for companies, which weighs on the economy.
Paradoxically, it may take a market pullback to get the trade deals done. This suggests more volatility to come in the weeks ahead. So while the macro remains uncertain, we see Q2 S&P 500 earnings come in ahead of expectations.
And we expect positive takes on AI from both Google and IBM reporting on Wednesday. The key metrics to watch from Google are cloud growth and any comments on user growth, both for its large-language model, Gemini, and its AI overviews. You probably have seen the AI overviews showing up in your search results more and more often.
This is Google's response to the AI-native assistance that we are increasingly using, such as JetGPT, Perplexity, and Cloud. In an antitrust trial against Google, Apple executive Eddy Cue recently revealed that in April of this year, Google searches within Safari dropped for the first time in 22 years. Why?
Because people are spending more and more time getting answers from large-language models. So we expect Google's AI metrics to come in strong. Yet over time, Google needs to more than offset any decline from search with new AI-based solutions.
Google is facing the classic innovator's dilemma. It needs to disrupt its most profitable core business with Gen AI solutions. For IBM, we watch out for the growth of Watson X, its Gen AI enterprise platform.
This we take as a broader sign for enterprise demand for Gen AI. So I'd like to leave you with three takeaways for this week. One, for AI to feature strongly in earnings this week.
That two, after a strong earnings season, the macro perspective will start to dominate again and that we need to brace for more macro volatility ahead. Thank you for listening. Stay well and stay ahead.
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