Signal over Noise with Ulrike Hoffmann-Burchardi

Happy New Year and welcome to Signal Over Noise. I'm Ulrike Hofmann-Bojari, CIO for the Americas and Head of Global Equities for UBS Wealth Management. Welcome to 2026.

We charge into the new year optimistic about global growth. We frame our investment outlook through three key lenses, macro, structural, and bottom-up fundamentals. And together they support a constructive outlook for the global economy and equities.

Let me go through each one. First, the macro picture is turning from a headwind into a tailwind. We see GDP growth picking up and inflation coming down.

The reason is that in the first half of this year, both fiscal and monetary policies are in stimulus mode, a mix usually reserved for crises or war, or in this case, perhaps for the 250th anniversary of the United States. On the monetary side, a Q1 Fed rate cut looks likely, driven by a sluggish labor market and contained inflation. We see three disinflationary forces at play this year, tariffs, shelter, and wages.

This year marks the anniversary of US tariffs, creating a favorable base effect that should pull inflation lower. Shelter inflation is still on the downward trajectory and wage inflation is coming down from the slack in the labor market. And we expect the labor market to remain weak.

The low-hire, low-fire labor market partly reflects AI quietly replacing jobs, in our view. We lack solid data on AI's full impact on jobs, but early signals are telling. The areas capturing the most AI value, software engineering, customer service, and marketing, are also among the weakest part of the labor market.

And one recent study found that early career workers in the most AI-exposed roles have seen a 13% relative drop in employment. The bottom line? Slowing inflation and a soft labor market make a Q1 rate cut likely.

This would bring the total easing in the cycle to one percentage point and provide a meaningful boost to economic growth through 2026. Fiscally, there are three sources of stimulus that further help the economy grow in the first part of this year. Tax refunds from the old BBVA bill, delayed spending from the government shutdown, and government spend on defense and industrial infrastructure.

So with all these macro tailwinds, what could add to macro volatility this year? Last year, trade politics fueled volatility. This year, geopolitics may take over.

Middle East, Venezuela, and Russia-Ukraine remain the flashpoints. On Saturday, President Trump ousted Venezuela's Maduro from power. But the biggest signal for markets may be his warning to Iran and how oil prices respond.

Iran's facing its biggest protests in three years amid economic collapse. The real has plunged over 40% since June. Minimum wage is $2 a day and inflation tops 40%.

President Trump declared the U.S. is locked and loaded to intervene if Iran cracks down violently. If Iran threatens to close the Strait of Hormuz, which is critical for Saudi shipments, oil prices will likely spike. High oil prices typically means high inflation and acts as a drag on growth.

But there are two important offsets. First, if this actually leads to regime change in Iran, sanctions get lifted and Iranian oil floods back into the market, pushing prices down. Second, global supply is already abundant.

The IEA is forecasting a record surplus of 3.8 million barrels per day this year, roughly 4% of total demand. This is why as of last week, oil prices had barely reacted to the rising Iran tensions. Both crude benchmarks are already down 20% year-over-year on oversupply concerns.

Markets are pricing in either quick resolution or adequate supply buffers. And we don't expect the situation in Venezuela to alter that view. Secondly, on structural trends, we expect AI, electrification, and longevity to remain key drivers of economic growth and equity returns.

Past transformations show stock prices of enablers rise first and then those of applications. The handoff is a question of when, not if. In the railroad era, steel, oil, and manufacturing companies leveraged completed rail networks to dominate returns from 1880 to 1900.

During electrification, consumer durables such as autos and appliances and broadcasting led the post-1932 recovery as utilities became regulated. And in the dot-com era, Google, Amazon, Facebook built trillion-dollar businesses on infrastructure late in the 1990s. In our view, 2026 will mark the pivot to application-layer value creation in AI and lift stocks beyond the AI7.

The seven ships and cloud companies that are the key enablers of AI and that have seen outsized appreciation over the last three years. So turning to bottom-up fundamentals. With the S&P 500 near all-time highs, valuations worry many investors.

Yet the forward PE has held steady at 25 times year-over-year, elevated by historical norms, but unchanged from 12 months ago. This is another data point that shows that valuation by itself is not a market signal. If growth keeps up like we expect and like it did last year, the equity markets are poised to end the year higher yet again.

With this, I wish you a great start to 2026. Stay well and stay ahead. UBS Chief Investment Office's investment views are prepared and published by the Global Wealth Management Business of UBS AG or its affiliate UBS.

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