House Call: Talking Equity Markets with UBS Asset Management

Hi, everyone, Dan Cassidy here. Welcome back to House Call, Talking Equity Markets with UBS Asset Management. For this month's episode, I'm glad to once again be joined by Jeremy Zierin, Senior Portfolio Manager for the Houseview Equity Portfolios and Head of the Private Client U.S.

Equity Team, along with Dominique Shager, Lead Equity Investment Specialist, joining us today from UBS Asset Management. So Don will guide today's conversation with Jeremy. They will focus their time on recent market developments and how they're shaping UBS Asset Management's thinking within the Houseview Equity Portfolios.

So with that, Don, let me now turn it over to you. Great. Thank you, Dan.

It's great to be back. So let's start with what's top of mind for investors right now. Jeremy, markets have been navigating a complex mix of macro pressures, geopolitical noise and shifting sentiment.

And after a challenging first quarter, U.S. equities rebounded sharply in April and recently pushed to all-time highs. From your perspective, what do you see as the key drivers behind this rally and what's been most surprising to you? Yeah, I would say that there's three or four key drivers behind the rebound.

First, even though we haven't seen a full return of the flow of oil to pre-conflict levels in the Strait of Hormuz, the initial ceasefire announced between the U.S. and Iran in early April signaled to investors that we're likely, not definitively, but likely past peak levels of uncertainty. And in some degree, that's been reinforced by oil prices trading between $85 and $100 a barrel until the last couple of days after they spiked to well over $110 in the early days of the conflict. And so indications are that potential worst case outcomes, like an escalatory forever war in the Middle East, something really economically damaging like $150 or $200 oil, or even a stagflationary spiral, at least for now, those have not materialized.

Crude oil future prices, looking out six and 12 months for delivery, continue to be well below stock prices as well, signaling oil markets expect some normalization over time. The implication is that the economy has remained resilient despite the high oil prices. Economic data is always a bit lagged, but the recent readings in data just haven't shown any discernible downtick in activity.

March's ISM manufacturing remained in expansionary territory. Retail sales surprised to the upside, non-farm payrolls, you know, growth was meaningfully beat expectations to $178,000 last month, you know, that's the highest figure in monthly job growth in over a year, and initial jobless claims, you know, remain low. And then, you know, the third driver is probably the biggest driver of why the markets have rebounded this month, and it's just the strength of the corporate profit cycle.

I've been saying for, you know, the past year or so that the corporate earnings cycle is outpacing the economic cycle, and that simply continues to be the case. You know, as earnings season has progressed, you know, reports from major companies and aggregate have, you know, topped the consensus estimates by a wider than normal level, and management teams, you know, across sectors have delivered results, and importantly, have maintained guidance, you know, reinforcing confidence that the earnings momentum behind, you know, this market is intact. Now, to answer your question on what's been most surprising, I would say it's just the speed and concentration of the rally in April, you know, after a probably, you know, pretty weak first quarter, stocks fell about 4% or 5% in the first quarter, you know, stocks are on track to have their strongest month in April in over five years, you know, and the rebound has been, you know, led disproportionately by the largest technology companies, and in particular, semiconductor and other AI infrastructure stocks.

And so, this has been a good reminder that even in a economically, you know, more balanced environment, market gains can still be driven by a handful of secular growth stocks or dramatic winners. And we've also just been struck at how resilient investor sentiment has remained in the face of some of the still, you know, lingering unresolved risks in the Middle East, you know, even though geopolitical tensions have persisted, you know, near-term uncertainties, you know, when core equity market fundamentals like earnings are strong. So, let's stay on the U.S. economy.

How would you characterize the current economic environment, and as you look ahead to the next few months, what are you watching most closely? I talked a bit about some of the near-term data, but taking a step back, you know, the U.S. economy today can best be described as resilient, but I still think we're in a late-cycle growth moderation, you know, to be sure the economy can stay in a late-cycle expansion for a long time. So, late-cycle doesn't mean that a recession is around the corner, but from a 30,000-foot view, you know, despite the strong March payroll that I mentioned, you know, trend labor market growth has decelerated.

You know, the job market largely remains in a, you know, low-hire, low-fire mode, but, you know, we've seen, you know, a slowdown or a deceleration in the rolling average three months of payroll growth, but we've also seen continued low unemployment. Consumer spending has been steady, wage growth has been fairly strong, and I think part of the positive tailwinds to the U.S. economy has just been that, you know, the tremendous asset growth we've seen in household balance sheets, and so there's a pretty good and healthy buffer to, you know, slowing job markets. You know, at the same time, we've generally seen mixed-up positive signals in the more forward-looking economic data.

Some indicators are soft, like reflecting early policy tightening and, you know, some of the recent uncertainty, so I did mention before, you know, things haven't rolled over and many things have been, you know, many data items have been resilient, but some of the more forward-looking items, like the ISM manufacturing new orders or consumer surveys did show some, you know, some moderation or a little bit of a dip in April, but, you know, on the other side of the equation, you know, some forward indicators have shown sensitive upticks, so it's really much more of a mixed picture in aggregate on the economy, but I also would just note that it's important not to look at the economy as one giant monolithic entity. You know, in reality, we have a K-shaped economy, right? On the consumer side, you know, the vast majority of consumer spending is being driven by high earners or asset owners, and, you know, the rising gas prices have further put pressure on lower-income cohorts, and even in the, you know, the business spending side of the economy of the K, you know, we see very strong spending on AI infrastructures and data centers and softer spending on, you know, general manufacturing and, you know, flat-ish industrial production outside of AI, and so one of the things that we're going to be monitoring, one is clearly inflation and the Fed, right?

We're going to have a Fed transition fairly soon. Inflation readings have been sticky. There's certainly a risk that if oil prices stay elevated at a minimum headline inflation, perhaps not core, but headline inflation, remains, you know, elevated and well above the Federal Reserve's 2% target.

We'll be monitoring labor market data for, you know, to be sure. You know, at the end of the day, you know, consumer spending is driven by the labor market, and when Americans have jobs, they tend to spend their paychecks, and, you know, out of the U.S. GDP, 70% of U.S.

GDP is consumer spending. We're looking closely at business activity and credit conditions. In the business spending side, we monitor, you know, many components of the ISM manufacturing and service indices, capital goods orders, which have held up reasonably well, and bank lending surveys, and bank lending surveys continue to show, you know, that banks are open for business, that we're not seeing a material tightening in credit that could lead to, you know, some worse economic outcomes.

And then, obviously, the geopolitics remains a wild card. You know, the conflict in the Middle East hasn't been resolved yet. We hope that we're on a path towards de-escalation, but, you know, until we finally get the, you know, the oil production and oil flowing back to something close to the 20% of production that was going through this trade-free conflict, oil prices, at least for short-term contracts, are likely to stay elevated.

You know, we did talk about this a little bit last month, Sal, but I think it's important to, you know, put higher oil prices into context, and that the general rule of thumb is that a $10 a barrel increase in oil shaves off about 0.1% of GDP growth. So, the U.S. economy can absorb, you know, $80 to $100 oil. It'll shave off a quarter to a half a point of GDP growth, but the GDP running closer to, you know, two, two and a half percent going into the year, and it looks like we're on track for something similar for the first quarter.

It just means that growth may slow a bit, but it shouldn't derail the economic expansion. That's a really good point, Jeremy. So, earlier you mentioned that corporate earnings momentum, and, you know, we've really seen earnings as the key support for U.S. equities in recent years.

As we reach the midpoint of earnings season, in particular this week with five of the max seven reporting, what's standing out to you so far, and how is it shaping your confidence in corporate fundamentals? Yeah, I mentioned at the, what is, in the beginning, the first question, what has been driving the rally, and at the end of the day, earnings drive the market over the long term. And the strength that we've seen thus far in earnings season, both in terms of actual results and in terms of forward-looking guidance, has been very encouraging.

So, companies have been beating expectations handily. So, to put some numbers behind that, as of today, you know, April 29th, about 80 percent of companies are beating consensus estimates, and year-on-year earnings growth for the first quarter is tracking towards 17 percent, and that would mark the sixth consecutive quarter of double-digit growth. And revenues are also rising in the high single digits and are tracking towards 10 percent top-line growth for the S&P 500.

So, all of this shows that demand remains healthy for many businesses across the S&P 500, and, you know, over the long term, you know, earnings is the primary driver, and just these results that we've seen really underpin the rally, you know, despite the geopolitical uncertainties that remain, you know, unresolved in the Middle East. I would say what's been even more impressive than the numbers that I just cited was that guidance, or the forward 12-month consensus earnings estimate for the S&P 500 has risen by about 10 percent in the first four months of this year. And so, you know, even though the market is up, you know, low to mid-single digits so far after April's big move, you know, stocks are still underperforming their core fundamentals since earnings estimates are actually rising at a faster clip than the overall index.

So, coming into the year, there was a lot of caution around AI, as investors started to question the level of capital spend we have seen and wanted clearer, more immediate returns. More recently, though, the caution has turned into renewed optimism. Jeremy, what's behind that shift?

And are investors treating all AI players the same? Yeah, just to reiterate, there was a significant amount of skepticism around the AI boom over the last few months. Investors were worried that, you know, companies, and specifically, you know, the biggest tech hyperscalers were just pouring enormous sums into AI-related capital expenditures without clear short-term returns to show for it.

And in recent weeks, you know, we've seen a turnaround of that. We've seen renewed enthusiasm for AI-related stocks. And I would say several factors are behind the shift.

First, you know, there's the evidence of AI's potential is becoming more tangible. Major companies are starting to demonstrate real use cases and revenue opportunities from AI investments. And you're hearing during earnings season, like leading chipmakers' earnings and guidance indicating the level of demand for AI hardware and infrastructure is well above expectations, suggesting that all of those data center investments by, you know, big tech companies are really driving sales.

And then similarly, you know, software and cloud companies have showcased new AI-driven products. And so we've seen a step function improvement in a lot of the frontier lab models and large language model capabilities. And so just more, just an increased use of, you know, chatbots and productivity tools that are gaining traction.

Second, I would say that the concerns about AI overinvestment have eased a bit. You know, part of the issue is timing. You know, at the beginning of the year, we had a few concrete results from the massive AI spending.

And now we're seeing, you know, like I mentioned, you're starting to hear more talk about the early returns on those investments and companies are starting to, you know, slowly quantify the benefits that they're seeing from, you know, new revenue streams or cost efficiency. It's also just becoming much more clear that enterprise adoption is increasing rapidly given the improvements in the frontier lab models. And so enterprises are moving, you know, from piloting or trialing, you know, select AI products to essentially putting, you know, AI agents into their, you know, regular production.

And then, you know, I would say an initial or an additional driver to some degree of valuation. While you never say valuation is a short-term driver for, you know, a four-week spurt like we've seen in growth stocks and technology sector, you know, valuation clearly had become more compelling by the end of the first quarter. You know, in November of 2025, so five or six months ago, the IT sector traded at its peak at 30 times forward earnings.

And by the end of March, the combination of the sector's weak performance and, you know, still strong and resilient and rising sector earnings estimates left the IT sector trading at 20 times earnings. So after, you know, a 33% valuation correction in its forward price to earnings multiple, you know, valuation for the sector, you know, it's become more compelling. Now, I would say it is important to dissect what's happened within the tech sector and within AI-related names because investors are not treating all AI stocks the same way, right?

They are, you know, investors have clearly become more discerning about who are the likely winners and who are the potential losers from, you know, the AI buildout. And what we've seen is that, you know, the market is rewarding the key enablers of AI, the picks and shovels companies, the companies that provide the infrastructure, the semiconductors, the platforms, the networking equipment, the electrical equipment that is really driving the, you know, and underpinning the AI revolution. On the other hand, companies that are either merely, you know, tangentially related to AI or worse, potentially at risk of AI disruption or disruption from AI models are not seeing a benefit and seeing the opposite, seeing, you know, share prices decline.

And so we have seen, you know, areas of the market like, you know, fast or software as a service, other IT services of consulting and outsourcing businesses, even financial data providers outside of the tech sector have come under selling pressure on fears that they could be disrupted from, you know, new AI technologies. Jeremy, thank you again for joining us and for sharing your insights. Some of the views and opinions expressed may not be those of UBS Group AG or its affiliates.

UBS Financial Services, Inc. offers investment advisory services in its capacity as an SEC registered investment advisor and brokerage services in its capacity as an SEC registered broker dealer. These services are separate and distinct, differ in material ways and are governed by different laws and separate arrangements. It is important that you understand the ways in which we conduct business and that you carefully read the agreements and disclosures that we provide about the products or services we offer.

For more information, please review Client Relationship Summary provided at ubs.com forward slash relationship summary. UBS Financial Services, Inc. is a subsidiary of UBS Group AG and is a member of FINRA and SIPC.