House Call: Talking Equity Markets with UBS Asset Management
The desk sees a positive outlook for equity markets driven by robust earnings growth, particularly spurred by significant increases in AI-related spending. Per the full note , UBS Asset Management reported a year-to-date market performance increase of approximately 12.5%, primarily due to an estimated surge in AI expenditures, from $500 billion last year to between $750 billion and $800 billion this year. This thematic investment may have broader implications for risk sentiment in currency markets, but the anticipated performance in equities suggests potential tailwinds for emerging market currencies that benefit from increased technology investments.
What the desk is arguing
The desk posits that the substantial growth in AI-related capital expenditure will continue to fuel equity market returns, presenting a positive outlook bolstered by underlying fundamentals. Jeff Hans of UBS highlighted that earnings growth has been the principal driver of this year's stock performance, framing the current market climate as one of cautious optimism amid heightened investment levels.
Furthermore, the discussion emphasizes that the influx of capital into AI can stimulate broader economic activity, potentially influencing growth rates across various sectors. The continual upward trajectory in capital expenditure could lead to further appreciation in equities, thus maintaining investor interest and confidence in equity-heavy portfolios.
Where it sits in our coverage
Given that no specific internal coverage data is available on relevant currencies, we focus solely on how actual market dynamics may reflect higher investor engagement in equity markets as described.
How other firms see it
While banks like jpmorgan and bofa have differing stances on future currency direction, this commentary indicates a more favorable view of equity and risk sentiment among aligned firms such as jpmorgan. Such divergences in outlook may lead to differing strategies in foreign exchange exposure, especially for positions sensitive to equity performance highs. Note how the EUR/USD trajectory has demonstrated resilience alongside the positive equity outlook discussed here.
What the calendar says
As no significant calendar events are scheduled in the coming month, traders should closely observe market reactions to evolving earnings reports and commentary from influential sectors like technology, which may serve as informal catalysts for currency movements.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 0112.5% YTD market increase indicates strong performance.
- 02AI expenditure projected to rise to $750-$800 billion.
- 03Equity market growth could support emerging market currencies.
- 04Ongoing advancements in technology likely to drive investor sentiment.
Market implications
Traders should monitor how global currency pairs react to the advancing equity markets, particularly looking towards emerging market performance that could derive benefits from strong equity fundamentals. With the current bullish sentiment, pay attention to thresholds in equity indices that could affect correlated currency movements.
Risks to this view
Potential risks to this outlook include a pullback in technology sector performance or a significant contraction in AI-related spending. Additionally, geopolitical tensions or abrupt policy changes from central banks could negatively impact investor sentiment, leading to corrections in both equity and currency markets.
We are back now to continue with our Talking Equity Markets podcast series, House Call with UBS Asset Management. Joining us for this month's episode, glad to welcome back Jeff Hans, Senior Portfolio Manager for the Houseview Equity Portfolios. We're joined as well today by Dominique Shager, Lead Equity Investment Specialist, again both joining us from UBS Asset Management.
On today's episode, Dom will lead the conversation with Jeff. They will discuss what's been driving markets, how the outlook is evolving, and the key opportunities and risks investors should be thinking about as we look ahead. So with that, Dom, let me now turn it over to you to lead today's conversation with Jeff.
Thanks, Dan. It's great to be back. I hope everyone had a great summer.
It certainly has been an eventful few months in the markets, and we're looking forward to putting some of the recent developments into context. So with that, Jeff, let's start with the big picture. How have equity markets evolved over the last few months?
How would you characterize today's market environment, and what have been the key drivers of return so far? Hey, Dom. Sure.
So this year, I'd say, like so many, has probably felt a bit more intense than it has been. So if we sort of frame things, the market's up about 12.5% year-to-date, and really the biggest driver of returns has been earnings growth. So let me first talk a little bit about some of the high-level drivers of the market, and then I'll dig a little bit into some of the more interesting dynamics that we're looking at beneath the hood.
So on the earnings growth front, the biggest driver really continues to be this massive AI spending that is funneling through into a lot of different parts of the economy. And so thinking about this, you had about $500 billion of spend last year. This year, estimates are anywhere from $750 to $800 billion.
This is a lot of capital that's being thrown around, and it's really impactful as it relates to the level of S&P earnings growth we're seeing this year. Just to put that into context, so S&P estimate revisions, earnings estimate revisions for 2016 went up 8% after the first quarter, and up another 7% after the second quarter. So if you look at what analysts are projecting for this year, for S&P earnings growth, it's about 30%, 31%, somewhere in that range.
Coming into the year, it was in the mid-teens range. So pretty remarkable growth just in two quarters. And so we've already had two straight quarters of 20% earnings growth for the S&P.
If you kind of look at forecasts for the third quarter and fourth quarter, it looks like it's continuing to track at least 20% in each of those quarters. And if that actually happens, it would be the 11th time in history that we've had four straight quarters of at least 20% earnings growth. And in most of those instances, I think it's interesting, it's been coming out of recessionary periods.
Obviously, that's not where we are today. And so clearly, the AI spending bonanza that we're seeing is just driving this enormous amount of earnings growth for the market. And our view is that that should probably persist for some time.
So that's kind of what we're seeing at a high level. If you look a bit below the surface, we're really seeing some interesting dynamics play out in terms of market leadership this year. Through the first half of 26, we had this incredible rally in semiconductor and hardware stocks and really any industry that was actually tied to AI infrastructure spending.
And what that did is it resulted in one of the largest momentum rallies in history. And so valuations on some of these stocks hit some pretty extreme levels in called the May-June time period. Now I would argue that much of the rally that we had seen during that period was supported by some pretty powerful earnings growth.
Just as an example, I think in late June, analysts were forecasting the S&P semiconductor industry earnings growth to be, I think it was around 90 or north of 90% growth this year. So the momentum and that rally in that subgroup that you had seen was certainly reflective or supported by earnings growth, but it had become somewhat extreme. And so you asked the question, Tom, what's evolved more recently?
I think the statement of what goes up must come down is kind of what we've seen since. And so during July and August, we witnessed one of the biggest momentum unwinds in history with a lot of these AI-levered semi-hardware and industrial stocks selling off pretty sharply from their highs. It was hard to sort of pinpoint anything specific.
It felt a bit technical. I'd say earnings momentum was still pretty supportive for that group, but there was a few things that are worth calling out that drew some of that risk off in that group. One, as I mentioned, I think the group was probably a bit overextended from a performance perspective.
Two, we were hearing more concern about the durability of AI infrastructure spending. And so whether it was political pushback on data center buildouts, more questions around the higher costs or rising cost of AI implementation, and then also what sort of returns enterprises were seeing from their AI spend, I think all those factors were sort of calling into question the durability of AI infrastructure spending. And then the third point is on the flip side of this sort of tech semi-hardware trade, a lot of the areas of the market that were being perceived as AI losers, so let's use software as the example here, got really cheap pretty fast.
And frankly, what I think we've been seeing is fundamentals in that cohort and some others have been actually holding up okay. So I think what a lot of these companies were doing was essentially proving out that AI was not disintermediating their business. And so we saw this huge rotation into this subgroup over the past few months, much more broadening out in the market where the AI winners sold off sharply.
Others rotated into other areas that were cheap and out of favor and had some better earnings than expected. So things like software, healthcare, financials have been doing better over the last few months. So speaking about market rotations, after several years of growth leadership, 2026 has been a significant rotation towards value.
As of the September 9th close, value has performed growth by roughly 18% year to date. So Jeff, what's driving that shift and how do you view it as a temporary rotation or something more durable? And even more broadly, and you kind of touched on this a bit, is this a sign that the market leadership is finally beginning to run out?
Yeah, this has certainly been a pretty impressive year for value stocks. Keeping in mind that prior to this year, value has outperformed growth only three times in the past 16 years. So you don't get it that often or you haven't in the last almost two decades, but you're seeing it again this year.
And so you asked a good question about sort of durability and broadening out, can it persist? You know, I touched on it earlier, you know, through the first eight months of the year, you know, it's been, you couldn't be in a better spot for value stocks. And what we sort of attribute to the outperformance has been this big acceleration that we've seen in earnings growth for the Russell 1000 value index.
So I talked about, you know, how earnings growth has really accelerated for the S&P, but we've also seen that across the value index as well. And I really think it's the same catalyst, which is all of this AI spending that's having this trickle down effect into, you know, really some cyclical areas of the economy. So you're seeing it across industrials, financials, utilities, energy, real estate, all benefiting, right?
So essentially all of the old economy sectors that we, you know, sort of know and love are benefiting from all this CapEx that's going into the construction and the powering up of data centers. So just to give some examples here, right, these are companies, you know, it would be industrial companies that are filling out the guts of the data center with industrial components, things like HVAC equipment, cabling, electrical equipment. This would be financial companies that are really benefiting from all of the massive debt and equity issuance that we're seeing that's helping fund this data center build out.
It would be utilities and gas pipelines that are seeing higher rates of growth. A lot of them are partnering with these tech companies to provide electricity and power for the data centers being built in their respective markets. And so we've just seen this translate into some really strong earnings growth in the more cyclical areas of the market, which tend to be more value centric.
So just to put it into context on the level of earnings growth, revisions for the full year through the first half are up 11%. And so earnings growth for 26 for the Russell 1000 Value Index is now expected to be up about 22%, which is the highest level in about 20 years, not including the year after COVID, which is not surprising because earnings were artificially depressed during the year of COVID. And so you asked the question, will market participation continue to broaden out?
You know, it's tough to say. I think if tech spending on AI, you know, continues through 27 and right now our baseline view is that it likely does. I think you're seeing some estimates calling for 1.2 trillion dollars in spending next year up from, you know, we think 750 to 800 billion this year.
I think there's a good argument to be made that a lot of these old economy sectors and stocks should still see healthy earnings growth ahead, which we think can continue to support some good performance for value stocks. And, you know, I guess if you want to call it broadening out, but just maybe some more evenness between the value and growth segments of the market. So Jeff, continuing on that thought, investors are still navigating a number of uncertainties surrounding the market.
What are some of the key risks on your radar today and what should investors be paying close attention over the next coming months? Yeah, I think from a risk perspective, you know, there's always sort of the tail risk events that you could ever foresee. But as we think about, you know, market risks, the biggest one that just kind of comes to mind is what we're seeing today, which is interest rates and commodities or, you know, the sort of the conflict in Iran is just, you know, continuing.
It's not really going away. It's leading to continued upward pressure on commodity prices. And, you know, I think you're partly seeing that also get reflected into higher interest rates.
You know, today sitting at 492, real rates are north of two and a half percent. You know, the 30 years is decently above five. You're back at levels not seen since 2007.
And so, you know, we're watching this closely. I think the economy is holding up, obviously, very well. I think a big chunk of that is really driven by all of this AI spending.
And so it's not like it's coming from a lot of rate sensitive areas of the market. That said, the higher rates go, the more risk it creates for valuations and market valuations. And given the move we've had up 12 and a half percent year to date in the S&P, up more than that in the value index, you know, I think that's the sort of thing that that could potentially drive more volatility.
So, you know, something that we're watching closely for sure, you know, obviously anything related to AI build out could be a risk or disrupting AI build out could be a risk. So you're hearing a lot more political noise ahead of the midterms around pushback on data center build outs and in a lot of different markets. You know, I think that's the sort of thing that can, you know.
Create some some market noise as well. We don't think it's a real risk of being stopped in terms of data center build out, but it's the sort of thing that can, you know, drive some some volatility here, too. So those are some of the things, I guess, that we're thinking about on the risk side and that we're watching pretty closely.
Thank you again for sharing your insights, Dan. Thanks, as always, for having us on. We appreciate everyone listening and look forward to continue the conversation next month.
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