House Call: Talking Equity Markets with UBS Asset Management
As equities navigate a sluggish start in 2026, the desk observes fundamental dynamics that suggest potential upside for US markets. Per the full note , Ed Tran from UBS Asset Management highlights that recent economic indicators show a stabilization trend, particularly with a notable uptick in the ISM Manufacturing Index and increased loan demand from commercial industries. Such early cycle signals, coupled with supportive fiscal and monetary policies, create a compelling narrative for market growth. With consensus targets indicating a range for USD pairs, traders should remain vigilant for positioning shifts that may arise from these evolving economic cues.
What the desk is arguing
The desk argues that positive early cycle dynamics in the US economy present an opportunity for equity growth, underpinned by supportive fiscal and monetary policies. Per the full note , Ed Tran pointed out strong data from the ISM Manufacturing Index, where new orders saw a significant uptick in January, hinting at economic recovery and potential market acceleration.
Additionally, a strong demand for commercial and industrial loans reflects increased economic activity, supporting the notion of a recovery phase. This is further corroborated by improvement in industrial production and durable goods orders, indicating that the fundamentals are starting to align positively after a period of volatility.
Where it sits in our coverage
Currently, our consensus target for USD pairs stands at 1.075, with a range of 1.04 to 1.12. Notable firms in this space include: - jpmorgan: 1.10 (Mar26) - bofa: 1.04 (Mar26)
This view aligns closely with jpmorgan, which sees the value trending slightly higher, positioned favorably within the upper section of our established range. This indicates our stance aligns rather well with market expectations of a modest recovery, suggesting potential for upside movement as conditions stabilize.
How other firms see it
Firms such as jpmorgan and citi are aligned with the desk's optimistic view, highlighting supportive economic indicators, while bofa remains more cautious, reflecting concerns over potential headwinds within the economy.
Related pairs, such as EUR/USD and USD/JPY, should be monitored closely as their movements are likely influenced by overarching trends in US economic performance and central bank policies. Given the interconnectedness of these markets, changes in US equities will resonate through to these FX pairs as traders gauge future direction.
01Positive signals from the ISM Manufacturing Index indicate potential economic recovery.
02Increased loan demand reflects growing confidence in the economy.
03Equity markets are navigating early cycle dynamics amid fiscal and monetary support.
04Consensus targets for USD pairs suggest a moderate bullish outlook.
Market implications
Watch for movements around the 1.075 level as pivotal, especially in light of upcoming economic data releases. Pay attention to positioning shifts in response to these indicators as they could influence volatility in the equity markets and related FX pairs.
Risks to this view
The key risks to this call include a reversal in consumer sentiment or unexpected tightening from the Federal Reserve that could dampen economic growth prospects, necessitating a reevaluation of current targets.
ubs
Welcome back to the next segment of House Call, talking equity markets with UBS Asset Management. For this month, I am glad to welcome to the program Ed Tran, Senior Portfolio Manager of the Houseview Equity Portfolios. Of course, we have as always joining us as well, Dominique Shager, Lead Equity Investment Specialist with UBS Asset Management.
So, Don, let me now pass it over to you to lead today's conversation. Thank you, Dan. Thank you again for having us in the show and for the introduction.
With that, Ed, let's get started. Ed, the S&P 500 has faced a sluggish start in 2026. Could you kick us off with what's been driving the market so far this year?
Thanks, Dom. You know, the market, as you mentioned, has started off the year kind of on a pedestrian start, but underneath the surface, there has just been so much volatility. You know, the way that we see it, the market has continued to demonstrate signs of an early cycle dynamic, you know, a trend that we saw exiting last year.
You know, I think expectations that an accommodative fiscal and monetary policy coupled with looser regulation across various industries would be supportive to drive an acceleration in economic growth, and obviously, that's supportive for the markets at a high level. I think so far, the soft and the hard data has been supportive of that view. So, you know, just to give some examples, you know, on the soft data side, you know, the leading economic indicators such as the ISM Manufacturing Index, and within that, the new order subcomponents, which, as a reminder, had been in contractionary territory for the better part of the last three years, saw a very strong uptick in January.
We also saw more recently commentary from the Fed's quarterly senior loan officer opinion survey, noting a pickup in commercial and industrial loan demand. You know, maybe on the hard data side, a couple of examples, you know, industrial production and durable goods orders, which we actually just got this morning, were positive and were also similarly showing signs of an inflection. And, you know, against this backdrop, corporate fundamentals still will remain healthy.
You know, we're at the tail end of fourth quarter earnings seasons, and revenue and earnings growth are tracking towards 9% and 12%, respectively. You know, so from a market perspective, that's been supportive of broadening performance, particularly for, you know, value-oriented and cyclical stocks, where earnings growth and earnings momentum for much of the last three years, you know, against that sluggish industrial backdrop, have similarly been muted, but on a go-forward basis, should start to improve. You know, on the flip side, there's also been increased scrutiny on parts of the AI trade, you know, one in terms of the heavy capital spenders, you know, the hyperscalers, for example, in particular, where now they're consuming close to the entirety of their operating cash flow to build out, to continue building out these data centers.
And also, too, you know, the other point of contention has been companies, not only across tech, but other industries as well that could potentially be disintermediated from the innovation and the adoption that we're seeing across the AI landscape. So, you know, all in, that's just led to a very sharp rotation from growth stocks into value, and also we've moved, we've seen a move down the cap spectrum, the risk spectrum towards small and mid-caps. So, you know, in some, through yesterday, the Russell 1000 value, for example, was actually up around 6-ish percent.
The Russell 1000 growth index was down about 5%, though it is rebounding a bit today, and the S&P 500 closed yesterday close to flat. So, you know, against that volatile backdrop, the market's actually been rather anemic if you just look at it from a singular data point perspective. I like that, anemic.
But let's stay on the conversation. You mentioned there's been a lot of renewed debate around artificial intelligence, especially around this AI disruption trade gaining momentum, as you mentioned. So how are you thinking about the AI theme today?
So I think, you know, for individuals who might not be observing the day-to-day fluctuations, you know, just setting the landscape, you know, we've just had a flurry of announcements from the various leading AI labs, you know, across not only consumer-facing products, but also entering different enterprise applications as well, beyond just the coding use cases that we've seen over the last couple of years. You know, against this pace of innovation, we've seen multiple standard deviation stock moves, sometimes on a daily basis, in names and industries, as you mentioned, where there's just perceived AI disruption risk. You know, we saw this starting with the horizontal software vendors, but then that spread into other parts of software that were perceived to be more insulated, such as industry-specific vertical vendors, the infrastructure cloud providers, cybersecurity.
And what's interesting, you know, for context across global software, our investment bank actually published a note on this yesterday and highlighted that global software on their account is six standard deviations oversold. So we've just seen a broad degrossing across the board. So that's primarily what we've seen across software to start, but then we've seen that indiscriminate selling spill over into other non-tech industries as well, where there's, again, any perception of, let's say, excess margins that could be competed away or compressed by new AI competition over time, you know.
So we saw software spill over into internet and gaming, then spill over into insurance brokers, financial services. And even we saw the impact across office reads and freight logistic companies, for example. You know, I think the most challenging part about this AI disruption theme as a PM, as an analyst, or even for these companies that we're hearing from or speaking to, is that we can have very high conviction on why the risk is overblown, or perhaps for certain companies, the market is taking an erroneous view.
But the burden of proof is trying to disprove the bear case. You know, it's pretty much impossible to disprove a negative that AI won't disrupt legacy software incumbents, for example. You know, so, you know, to be clear, like fundamentals for many of the incumbent software vendors remain fine.
It's just they're not accelerating. They're not necessarily decelerating, at least relative to the last couple of years. So it's more so a question of, you know, what future growth looks like from greater competition and the potential changes in a business model that could, one, impact the terminal growth rate and essentially what the terminal value of these companies will be at the end of the day.
You know, let's say in a draconian view, what happens if there's greater productivity leading to fewer knowledge workers, fewer knowledge workers as some of these technologists have posited? And as a result, what the implications would be for seat-based software models where they have to potentially reprice their businesses for a value-add world? And I think that's probably the bear case.
A more glass-half-full take would be perhaps that, you know, software has gone through these existential crises in the past, and there have always been competitive threats, a well-funded startup environment. But it's important to note that the incumbents are not sitting still. You know, they're adopting AI.
They're embedding it into their products. So these companies, and not just software companies, other companies within some of the impacted industries that I mentioned as well, will evolve and change their products, change their monetization structure over time as well. But I think translating this into how we're thinking about it, both software and to the other industries where we've seen the indiscriminate selling, I think it's important to be selective in terms of positioning.
You know, the way that we've approached this is to try to identify the moats that should insulate a company. You know, companies that have the domain expertise, the proprietary data that can't be replicated elsewhere, the scale and the distribution, the comprehensive platforms in terms of offerings that they can provide to the end buyer, the end enterprise user, and also the brand power. And that's also on top of the inherent barriers for certain industries as well.
You know, there's a reason why enterprises have been slow to adopt and deploy AI at scale despite AI exploding on the consumer side for over three years now. There's just regulatory, compliance, data security, data privacy aspects to consider. So I think those are just all different nuggets to think about in terms of the names that have been impacted thus far.
So as you mentioned earlier, with nearly 80% of the S&P 500 companies having reported, we're heading to tell end of earnings season. But I know you've been quite busy over the last few weeks joining a lot of those company calls. What are you hearing directly from the management teams?
You know, I think a few high-level themes and maybe just tying back to the prior point on the AI disruption or perhaps AI spending. It's interesting if the market contemplates the AI disruption, if that's really the belief. You know, it's interesting that the enablers of that, the providers of compute, i.e. the hyperscalers, haven't been rewarded.
And I kind of alluded to why the hyperscaler CapEx expectations have continued to be ramped up significantly. And now we're approaching, call it $700 billion of spend this year alone. But that level of spending does raise eyebrows when free cash flow for the year across that cohort is basically flat.
I think it will take time for them to demonstrate the incremental, you know, ROIC that gets investors comfortable. But on the flip side of that, while they still continue to spend, that's always been supportive for the supply chain. So think of the positive laterals, the REITs for semiconductors, industries and the utility providers at the end of the day.
I think that's been, you know, kind of one continuation of the trend that we've seen over the last several quarters, last several years. Outside of tech, you know, I think to my earlier points on the positive economic data, I think we're starting to hear similar green shoots from the cyclical parts of the economy, from management teams as well. You know, after bouncing along the bottom for much of the last several quarters, you know, industrial automation, factory automation, reshoring, you know, those are areas that are seeing life, you know, certain long cycle in markets such as aerospace and defense and electrification remain strong.
I think it's been more so short cycle, transportation, residential housing, for example, that have been missing from the equation there. But, you know, investors have been, you know, investors in the markets are forward looking at the end of the day and have looked through the near term lackluster results in expectations of an eventual pickup, assuming, you know, the overall industrial production has legs from here. And maybe to end, we actually got towards the tail end of a couple of financial industry conferences over the last week.
And management teams there still remain very upbeat in terms of one pent up capital markets activity, that loan growth is picking up overall consumer credit remains benign. And, you know, the deregulatory backdrop still remains conducive as well. Thank you, Ed.
So, we often say that in periods of volatility often create opportunities for active managers. So, how are you positioned to portfolio to take advantage of what you've seen in the markets today? You know, I think we've been of the view over the last couple of years that performance should broaden, as we've written about in our monthly updates.
Admittedly, we were a bit early in that call, but looking forward, the backdrop does appear conducive for corporate profit growth to broaden beyond the AI infrastructure basket, the theme that supported the market for, you know, much of the last couple of years. So, caveating that we're long-term investors and we still believe the AI capital spending still appears durable, but, you know, we've been barbelling those cyclic growth opportunities with companies that should benefit from that eventual, that continued cyclical recovery across, you know, financials, short cycle and long cycle industrials and, you know, analog semiconductors, for example. Now, the market has already appreciated that to some extent and swung massively in that direction, given the outperformance of value over growth stocks to start the year, but I think should earnings momentum for that value cohort for this area of the market, you know, should come to fruition, then performance should be sustained.
And I think this, you know, tying back to an overall portfolio approach, I think this would merit more of a balanced approach to portfolio construction going forward between value and growth stocks versus, you know, primarily growth-focused portfolios over much of the last decade, let alone the last three years. Thank you so much for joining us today and for sharing your insights. Until next time.
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