How should I be positioned? with Richard Bernstein (Janus Henderson) and Jason Draho (UBS CIO)
The current macroeconomic landscape in the U.S. is evolving, with expectations for the Federal Reserve's policy adjusting as we approach the end of 2026. Per the full note source, Richard Bernstein highlights that the Fed's potential for rate cuts may be more limited than market players anticipate, suggesting a potentially bullish stance on equities amidst these monetary conditions. The desk notes that ongoing improvements in employment and consumption data could significantly shape traders' sentiment going forward, aligning with Bernstein's assessments that contradict overly pessimistic forecasts about economic slowdown.
What the desk is arguing
The U.S. economic outlook remains more resilient than many had feared, with the Fed likely retaining a tighter monetary stance longer than market participants expect. Bernstein's commentary emphasizes that while some are counting on multiple rate cuts, the Fed may not have the flexibility for such a course due to solid economic fundamentals.
Supporting this analysis, recent employment data has indicated stronger-than-expected job growth, reinforcing the idea that the U.S. economy likely won’t experience the dismal scenario some have predicted. With consumer spending continuing to drive economic momentum, a re-evaluation of portfolio allocations towards equities may be warranted, particularly if conditions evolve as predicted by analysts.
Where it sits in our coverage
Our consensus target for USD/EUR stands at 1.075 (range: 1.04-1.12), with jpmorgan projecting a target of 1.10 for March 2026, reflecting optimism aligned with the current macroeconomic insights. Conversely, bofa's more cautious forecast at 1.04 suggests that not all analysts are on the same page regarding the strength of the U.S. economy going into year-end.
This view somewhat contrasts with the broader market consensus, where bulls and bears diverge sharply. The desk's position appears to lean towards the upper end of expected forecasts, suggesting a potentially bullish trading strategy in light of ongoing economic indicators.
How other firms see it
Firms such as jpmorgan and goldman sachs share a more optimistic stance in the current environment, supporting the notion that equities could perform well as the macro backdrop remains favorable. On the other hand, bofa offers a more conservative perspective that aligns with its lower target for USD/EUR.
Market participants should be vigilant regarding movements in currencies like USD/JPY and GBP/USD, which reflect broader trends in monetary policy and economic data releases. These pairs can provide insights into how sentiment shifts and can offer valuable trade opportunities going forward.
01Fed policy may be less accommodative than anticipated
02U.S. economic data points to resilience
03Bullish sentiment on equities could emerge
04Traders should adjust positioning based on macro signals
Market implications
Watch for USD/EUR movements around the 1.075 level, which could signal trader sentiment shifts based on upcoming employment and inflation reports. A further strengthening could open new long positions given the favorable macro indicators discussed.
Risks to this view
Any unexpected downturns in job growth or consumer spending might force a reassessment of the bullish thesis. Additionally, if inflation indicators rise unexpectedly, the Fed may opt for a more hawkish policy stance, reversing the current trends discussed.
ubs
Hi everyone, Dan Cassidy here. Welcome back to How Should I Be Positioned on the UBS Market Moves podcast channel. On this podcast we like to catch up with industry colleagues and thought leaders to exchange views on the current market and macro environment as well as thinking when it comes to asset allocation.
Joining us for today's episode, glad to welcome back Richard Bernstein, the recently named Global Head of Macro and Customized Investing at Janus Henderson Investors, which was previously the CEO and CIO and founder of Richard Bernstein Advisors and prior to that the Chief Investment Strategist at Merrill Lynch. We are joined today as well from the UBS Chief Investment Office by Jason Draho, Head of Asset Allocation for the Americas. So with that Rich, Jason it's great to be back on the mic with you both.
Rich, I recall you last joined us back in December of 2025. So very much looking forward to hearing your current thinking on the market environment and Jason look forward to hearing your thinking as well. Wonderful to be here, thanks for the invitation.
Rich, it's great having you here and don't worry I'm not going to pull up your comments from December last year and all your forecasts and quiz you. Water under the bridge at this point in time, whatever it was, it's time to move forward. So a lot to cover maybe to begin big picture if we look at the macro environment, the U.S. economy, we're just a bit past the midway point of 2026.
Rich, how would you characterize the current U.S. economic environment? How have conditions shaped up relative to your expectations heading into 2026 and how do you anticipate that the environment will evolve from here? Yeah, so guys, thanks again for the invitation to be with all of you.
I think, you know, Jason mentioned, you know, December where we were in December and I think our big theme in December was that the Fed was not going to have the latitude to cut rates as many times as people expected, right? If you go back to December and January, people were looking for, you know, one, two, three, even on the extreme four rate cuts in 2026. And we thought the economy was just simply too strong, that inflation was still too much of a risk, that the financial markets were too speculative and that, you know, put it all together that the Fed didn't have the latitude that many people thought to cut rates.
And we thought that was important because we thought we had entered some kind of speculative environment. You know, I think when people can't tell the difference between the financial markets and the prediction markets, I think we're clearly in some kind of speculative environment. And we said that, you know, the lifeblood of speculation is excess liquidity and who is the steward, the main steward of excess liquidity would be the Fed.
And so we thought if 2026 rolled through that fundamentals would play a bigger role and we'd start removing the speculative element from the financial markets. And I think that's kind of happened, right? We've seen a continued broadening of the market as fundamentals, as profitability has spread through a broader part of the economy.
I think inflation has been stubborn. I think there's cyclical and secular reasons why that's happened. And so fundamentals are mattering.
You're seeing this broadening of the market. And I think that's kind of what should be going on in this environment. I think the shock to people and not to us, but I think the shock to many investors has been how could this transition take place when the market is still going up, right?
I think people said that if we're going to go away from the mag seven and the market's going to broaden, the stock market has to go down. And of course, that hasn't happened. And I think that's largely because the economy is quite healthy, the corporate profits are healthy, and it's supporting this broadening of the market.
So that's kind of where we were. I think that's where we are right now. I think the big thing that investors should focus on is still inflation.
I think it's more than oil, I think, and more than energy. I think that's kind of a cop out to just say that that's the only thing that's going on here. And I think there's both cyclical and secular impulses for inflation that have not subsided.
So I still think that's the biggest issue. Well, I'm going to follow over to this template of acknowledging maybe a little bit what we thought back in December and sort of what sort of played up perhaps, what hasn't. We were in the camp that we thought the Fed would be cutting and would have cut by now.
That's not materialized. And so the risk at the moment is that the Fed could hike and not cut. We still believe that that's not likely to happen, but that certainly has changed.
And for some of the reasons that we might have anticipated with the situation in the Middle East being something that would have been kind of unanticipated. But the other key part of the macro environment was that the view that we had, I think a lot of people had, is that growth would be quite solid in the first half of this year to accelerate. From 2025, it was being lifted and get a boost from fiscal support and tailwinds.
And we will get, we're recording this before we get the second quarter GDP numbers, but I think we'll comfortably around like 2% growth in the first half of the year. We can even see some acceleration in profit sector activity and consumption in the second quarter with good momentum headed into the summer that will probably moderate a little bit overall, which is, if you think of the contours that we would expect for this year, that's been playing out and the macro conditions growth-wise are still good. I think that ties into what Rich mentioned regarding the cyclical aspects to inflation.
There is still strong investment demand, AI cap expending, you can see coming into like impacting some of the inflation data beyond sort of more structural factors. So there is kind of that, but I think from a macro story, relatively constructive and expect that inflation will moderate. It is the key driver more so for the perhaps growth that's moving the markets, but ultimately I think it's going to move in the right direction.
So that's kind of our view. And I know Rich, you mentioned a few different things that I want to kind of dive into. And like we can, you can give me your kind of thoughts on inflation, whether you think it'll come down or not, but maybe more when I think of that, like whether it's inflation or growth, these are macro factors that are driving the markets.
Yet when I look at equity market performance over the past two months, the S&P is relatively flat in a narrow range of about 73.50 to 75.50, like about 200 points. Beneath the surface, there's been massive amount of churn rotation. This momentum factor has had its biggest drawdown in many, many years.
You're seeing almost on a daily basis, like semiconductor stocks could be up 5-10%, they could be down 5-10%, like individual stocks. A lot of churn, this is reflected by the fact that the intra or the pairwise correlation among S&P 500 stocks is at a multi-year low, like very, very low levels historically. Dispersion measures are very high.
When I look at that, that means things to me like this is a very more micro-driven market, it's not a macro-driven market where like all the correlations are going to one. If the market was really worried about inflation, it would be, you know, you'd see that sort of like everything sort of moving together. And so, yes, I agree that inflation sort of been the bigger story, but for the markets and the equity markets specifically, is it like, is it how big a story do you think it actually is versus like, ultimately, everything in the markets, equity markets, it sort of boils down to views on AI.
Right. No, Jason, you started with the crux of the whole issue, which is great. I think, look, I think inflation is not always bad for the equity market.
Some, you know, a certain amount of inflation actually is healthy because companies have pricing power. Right. We kind of forget, we always talk about the economy in terms of real GDP and real consumption.
We use the word real a lot, but corporate profits are nominal and people tend to forget that. And pricing power can be an important part of corporate profits. And so, you know, some inflation is actually good for profits and some inflation I think here is fueling the strength that we're seeing in the broadening of corporate profits within the U.S. economy.
I think, you know, that's where we are. Where inflation can turn ugly is when it is accelerating and the Fed feels the need to clamp down and start raising rates. Right.
I think that's, you know, the old saying is the Fed takes the punch ball away from the party. And my guess is that will eventually happen in this cycle and the Fed will be the spoiler, as they always are, but I don't think we're there yet. I don't think there's enough inflation that is causing that kind of problem.
Now, let me go, let me put something like tangible onto what I just said. So everybody knows that gasoline prices are up. Right.
We could argue with how much they're up and everything, but they're up. Right. We all know that.
But yet we haven't seen the consumer change behavior. We've seen them whine. You've seen consumer confidence numbers, you know, plummet.
You've seen people very concerned about the price of gasoline, but they are not changing behavior. Retail sales, core retail sales have stayed very healthy. People are not changing behavior.
And why is that? Well, because gasoline prices are up, but they're not up as a percent of income or wages the way they were in the 1970s. So a lot of people said, oh, this is the 1970s all over again.
We disagree with that. We don't think that's right, because in the 70s, gasoline prices a percent of wages really kind of took over the pocketbook, the household pocketbook to a large extent, the amount of discretionary spending. And that's not happening now.
That's not happening. So we're only with the rise in oil prices that we've seen, we're only back to the long term average of what gasoline represents as a percent of wages. So we're not even over the long term average yet.
So I think we're still in, if I can say this with a, you know, it's kind of an oxymoron. We're sort of in the good part of inflation right now, where it's helping profits, but it's not straining consumption. Now, will that change?
Most likely at some point. Will the Fed feel the need to clamp down? Most likely, I would argue, at some point.
But clearly, we're not there yet. But your point's very well taken. Perhaps we should clarify, so you don't get attacked by the proletariat, that good inflation for the markets, equity markets, yeah, not necessarily good for the general public overall, even if obviously some consumers are still holding the book.
Right, I'm not advocating that we should all pay higher prices, no. So we're recording this the day before the Fed's going to meet on July 29th. Market pricing is 35% chance of a hike.
It feels very uncertain, you know, more so than usual that we would have a sense of whether it's a fake and a hike or not. Some of that perhaps is by design, because the new Fed chair, Kevin Walsh, is choosing not to provide much clarity and guidance on what he's actually thinking. And so I could ask you, like, what you think they'll do, but it almost feels like that's kind of a question, like, can you read Walsh's mind?
And if you can, please, you know, call me afterwards. You know, but it's like, how would, you know, independent of, like, what might happen tomorrow, do you ultimately think, given the inflation views that you have, that it's inevitable that the Fed would hike? You think, like, this is my base case of not, it won't be July, but September before the end of the year, they're going to have to hike, you know, it's just going to be persistent?
Or do you think there'll be, they shall moderate enough that the Fed can feel comfortable to be on the sidelines? So it's interesting, you know, there is a little bit of psychoanalysis here. I'm not sure I can do that.
I kind of feel like, as you do, that they're probably going to stay on hold, you know, but that I could be completely wrong in 24 hours. But I kind of think they'll stay on hold. I'm not sure about the fall.
I think they've gotten a little bit of reprieve by the recent inflation numbers. And I think that gives them a little bit of breathing room. But I think the emphasis is still going to be on tighter rather than easier monetary policy.
The other thing I would point out, which I have to say, I'm surprised that more people haven't talked about this, is that Fed Chair Walsh has talked about really increasing, decreasing transparency of the Fed. And I personally believe that is very healthy for the economy overall, not necessarily for the stock market, and not necessarily for short-term traders. But I'm just saying for the health of the economy overall.
And the reason I say that is that when people feel, when investors feel that they have complete certainty about monetary policy and they know exactly what's going to happen, they take more risk, and I would argue excessive risk. It encourages that level of transparency, encourages speculation. And as opposed to just normal speculation, you get more bubbles, right?
I mean, like it's pretty clear in the last 20 years, we've had a fair number of bubbles in a fair number of areas of the economy. And I would say part of that is because people think they have certainty. And what he's suggesting is that we are going to raise risk premium by getting rid of that transparency.
And the reason I think that's beneficial to the economy longer term is that risk aversion forces companies, forces investors to make more rational decisions. I think people are going to look back on this period of a lot of what's going on in the market over the past couple of years, and they're going to laugh at all of us. They're going to say like, can you believe they thought that was really a good idea, right?
As opposed to what's really needed in the economy. And there's all kinds of charts that we put out on this. But I think I've said on this call with you and Dan, Jason, that Elon Musk wants to go to Mars, and that's fine, that's cool.
But I just want to get across the Cross Bronx Expressway in under an hour, right? And the Cross Bronx is I-95, for those of you who don't live in New York. It is the major north-south route on the East Coast.
And so when you're stuck on the Cross Bronx Expressway, you are surrounded by 18 wheelers not being able to deliver their goods. It seems to me if we want the US economy to be more competitive, if we want to see productivity improve, things like that are getting across the Cross Bronx Expressway in under an hour is more important than going to Mars. And so I think people are going to look back at this period and say, what were they thinking?
They wanted to go to Mars? Why are we saying that? We're saying that because basically, it's free money.
The hurdle rate is perceived to be zero. Obviously, it's not anymore. But there is this perception that we all know exactly what monetary policy is going to be.
So I think that change from Fed Chair Walsh is the most interesting thing that he's said, more so than is he going to raise rates or not. So I think to put it in more market jargony terms, that this is saying Walsh is taking away or greatly reducing the Fed put to eliminate or reduce the moral hazard problem where investors are willing to take risks because someone else will come and clean up the mess. And therefore, that reduces.
Yeah, exactly. It is like this is an open question of like, the world is different today than it was 30 years ago. I mean, broadly speaking, mostly in financial markets, the information that investors have is a communication strategy that's less transparent, which is actually beneficial.
And then there's pros and cons and then certainly different viewpoints, timelines and all that. And like that, we can revisit this in a future conversation. On this point about speculation, your opening comment regarding the Fed and you thought the Fed would be perhaps more restrictive than investors thought, that was the view come into the year that would help reduce speculation.
Yet by some measures, especially when I think about what's gone on in the past few months of semi-conductor stocks, but also how investors are trading at using leveraged ETFs and zero day options. So it feels like there's a lot of speculation, not just in the US anymore, you're seeing it in other countries. Do you feel this is not the level of maybe perhaps 2020, 2021, where there was truly like free money?
There is a cost of capital now that didn't exist five or six years ago. But do you feel like it has been a year, a lot of it has been heavily driven by speculation on moon shots or Mars shot kind of views? I think the words that I would use are, oh my.
I mean, it's mind boggling as to the amount of risk that is being put into the financial markets these days. Think back for those of you who were in the business 16, 17 years ago, 18 years ago, whatever it was, after the global financial crisis, and how risk averse investors were. All they wanted to talk about was large cap, high quality, dividend paying companies.
They did not want to be overweight equities. It was all about income. It was all about fixed income.
No equity risk, no beta risk at all in the portfolio. People thought it was the craziest thing to take beta risk. Look at where we are today, where Jason using about the leverage and everything.
They not only want beta risk, they're leveraging beta risk. I mean, talk about going from one extreme to the other. It's unbelievable.
And I started by saying how people can't understand the difference between financial markets and prediction markets. I mean, that's it. The prediction markets now advertise saying, and there's reasons why they do this, and I understand that, but they talk about, you know, you can trade anything.
Well, what do you mean you can trade anything, right? I mean, you're betting. I mean, how the words betting and trading became synonymous is beyond me.
Given this sort of reality that we're in it, and maybe Warsh's approach to monetary policy could, you know, prick some of the air out of the bubble, or like, you know, the balloon, I don't want to say the bubble, but like, just help dial it back, and hopefully it's in a more orderly process. But this could take, if not months, quarters, or even a few years, because this is, we're talking about it really since the late 1990s or early 2000s, where you've had a Fed that's basically always been willing to kind of step in when there's been sort of real equity or economic problems. And so there's a lot of people who've just conditioned and, you know, worked in the industry long enough that that's all they've ever known.
So to sort of go against that, that's a hard change. So given that's the reality, let's say, at least for the next year or so, how then do you think, as an equity investor specifically, sort of navigate that? How do you think about weighing the fundamentals versus speculation, AI, you know, you can look at the size of the companies that dominate the index, you get concentration risk, things oscillate a great deal just on, you know, views like, will they monetize or not monetize?
Like, how do you sort of navigate this? And again, for the moment right now, thinking six months, a year out, like, or even beyond, what do you actually like? Like, how would you allocate sort of within an equity portfolio, given all these various challenges?
Right. So, Jason, I'll ask that two ways. First, that, you know, for many years, I've been using the analogy of a seesaw and how the equity market looked like a seesaw.
And everybody was piled into one side of the seesaw. And that side was doing great. And everything else was getting left behind.
But that would cause imbalances in the economy. And that we, you know, just the natural capital allocation process would begin to realize that there was more opportunity on the other side of the seesaw. And that you didn't have to be too sexy.
You just wanted to have exposure to the other side of the seesaw. And I think that's what we're experiencing right now. I think as we're seeing the other side of the seesaw appreciate, regardless of the direction of the market, right, the market can go up, market go down.
But I think we're seeing the seesaw rebalance. The second thing I would advocate right now for an equity portfolio is to realize that growth, whatever, however you define that, growth is much, much, much broader than the AI trade and the AI kind of universe that people are talking about. We put out a chart that was on our quarterly seminar, which everybody can get if you go to rbadvisors.com, you can get that replay.
I would encourage you to do that. There's a chart in there that shows every stock around the world, world being the ACWI index, every stock around the world that has a projected long-term growth rate of 25% or more. Right now around the world, there are a little over 200 stocks that are projected to grow earnings 25% or more.
And there is only one of the magnificent seven in that group, only one. And I think the market is clearly starting to question as to whether that one stock should be there. Now, what that says is, and what we show it to you color-coded by region of the world.
And what it shows you is, number one, there's a lot of stocks that are projected to grow 25% or more. Number two, they're from all over the world. So, you know, don't be myopic in terms of saying it's all got to be AI and technology.
There's a lot of growth in other sectors within the United States. There's a lot of growth in developed markets. There's a lot of growth in emerging markets.
There's growth everywhere right now and nobody cares. So why do I bring that up? I bring that up because the data show that the average individual investor has about 6% to 8% in non-US stocks.
ACWI is 35% of the global equity market, but yet people have 6% to 8%. If individual investors were to triple their exposure to non-US, they'd still be massively underweight. But imagine what that flow of funds would do to the non-US markets.
So I think that there is a huge opportunity for growth that people are just ignoring because they think the only place to go for growth is AI and data centers and semiconductors. And I just don't, I think they're missing a monster opportunity that's out there. Well, Rich, I think that's a good mic drop moment.
You know, our time today was a little bit shorter than normal, but I really appreciate your thoughts and a lot to think about as we head into the second half of the year. Yeah, great. Thanks to be with you.
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