Signal over Noise with Ulrike Hoffmann-Burchardi
The desk interprets the implications of Ulrike Hoffmann-Burchardi's recent insights on the US market outlook, highlighting a compelling combination of policy support and shifts in the AI sector that may bolster economic growth. Per the full note source, the potential for additional Federal Reserve rate cuts, alongside expected fiscal stimulus in Q1, could support an incremental boost to real GDP by up to 1%. With the Fed's dovish pivot and fiscal measures expected to place approximately $100-$150 billion back into the hands of consumers, there is a prospective tailwind for risk assets, including USD funding pairs.
What the desk is arguing
The desk sees significant momentum building from Federal Reserve policies and fiscal measures that are likely to propel growth in the first half of 2026. Hoffmann-Burchardi points specifically to a 1% expected lift in real GDP, driven by liquidity injections from T-bill purchases and a further Fed rate cut anticipated in Q1 due to a soft labor market.
There is also an important focus on the AI narrative transitioning from capital expenditures to enhanced cash flows in companies like Oracle and Broadcom. This shift may indicate that the broader market will reward entities able to capture value through effective technology implementation rather than merely increasing investments.
The alternative read would involve skepticism about the Fed's ability to effectively transmit liquidity into economic growth, particularly if consumer confidence does not rebound strongly after tax refunds hit households early in the new year.
Where it sits in our coverage
Our consensus target for USD is 1.075, with a range spanning from 1.04 to 1.12. Notable targets include:
This desk's view aligns closely with jpmorgan, which predicts a stronger dollar amidst the supportive fiscal landscape but diverges from bofa's more cautious outlook, positioning at the lower end of the spectrum.
How other firms see it
Overall, jpmorgan echoes the desk's optimism regarding fiscal injections, while bofa takes a more conservative stance, foreseeing limited upside potential amidst still-present economic uncertainties.
Given the interplay between expected Fed actions and inflation dynamics, watch pairs like EUR/USD for signs of reaction. The trajectory of these major pairs may be closely tied to the forthcoming shifts in monetary policy from the Federal Reserve.
What the calendar says
No high-impact events are scheduled in the immediate future, particularly notable as the market awaits the Fed's decisions around key indicators released in early January.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01Signs indicate a Fed rate cut could contribute over 0.5% growth due to confidence rebound and credit transmission.
- 02Fiscal stimulus via tax refunds will inject significant liquidity into the economy, supporting GDP growth.
- 03Shifts in AI investment focus from capex to cash flows may redefine market valuations for technology firms.
- 04Current dollar strength may be supported by policy and fiscal dynamics, with a critical look ahead to upcoming labor data.
Market implications
Market participants should monitor upcoming labor data releases of non-farm payrolls projected for early January as they will be pivotal in shaping the Fed's policy decision and influencing USD strength. Current levels to watch include resistance at 1.075, which corresponds with our consensus target.
Risks to this view
Should non-farm payroll data indicate stronger than expected job growth or inflation metrics show signs of resurgence, this could prompt a hawkish revision from the Fed, undermining the current dovish narrative and potentially bolstering the dollar. Likewise, failure of fiscal measures to stimulate consumer spending effectively could also dampen market expectations.
Hello and welcome to Signal Over Noise. I'm Ulrike Hofmann-Borchati, CIO for the Americas and Head of Global Equities for UBS Wealth Management. Last week offered an early read on the signals that are likely going to shape the US markets next year.
Policy tailwinds and an AI story that is moving from capex to cash flows. Let's start with the policy tailwinds. Monetary and fiscal policy support could provide an incremental real GDP boost of 1%.
On the monetary side, the Fed not only lowered rates last week, but is also adding liquidity by buying T-bills. And we see a room for another Fed cut in Q1, driven by a sluggish labor market and contained inflation. We expect the non-farm payroll numbers for October and November that will be released on Tuesday to be weak.
These two releases together with the December non-farm payroll number on January 9th will be the most important input for the next Fed decision on January 28. A 1% decline in the Fed fund rates could add more than 0.5% to real GDP growth over the next quarters, if credit transmission is strong and confidence rebounds. On the fiscal side, tax-free funds in Q1, together with delayed spending from the government shutdown should give a further boost to the economy in the first half of the year.
Treasury Secretary Besant spoke to about 100 to 150 billion in refunds coming in Q1. Working American households could receive between 1,000 and $2,000 per household when they filed their 2025 taxes in early 26. These refunds alone are equivalent to 0.3 to 0.5% of US GDP.
Turning to AI, AI stocks are no longer rewarding pure increases in capex and order backlog. Last week, Oracle's and Broadcom's earnings added two more data points. The lessons from transformational innovation historically is that the majority of value capture over time accrues to the application layer, to companies that use the new technology.
And in our view, the AI story next year is pivoting to companies that increase cash flows from using AI. What we have seen so far is that the seven enablers of AI, the chip makers, NVIDIA, Broadcom, AMD, and Micron, and the hyperscalers, Google, Amazon, and Microsoft, have appreciated almost as much as the other 493 stocks in the S&P 500 since the launch of JetGPT three years ago, about $12 trillion. And with AI adoption increasing to 17%, up from 10% among US corporates, we see the beneficiaries of AI's broadening out within technology and also extending to other sectors of the economy.
Healthcare and financials are the two sectors where we see the most upside from AI. Both sectors have a large number of knowledge workers and differentiated data sets to increase productivity. So to conclude, policy tailwinds and more widespread AI value capture support a broadening of leadership in the equity markets.
This is a pattern we have already started to see over the last month, where the AI seven have consolidated, yet the S&P 500 has appreciated. A market blueprint we see continue into next year. The biggest pushback to this view is that valuations are high, yet market direction comes from fundamentals, only the amplitude from valuation.
High valuations tend to lead to larger corrections when fundamentals disappoint. So fundamentals warrant higher scrutiny right now. Where do we see the biggest risk factors?
In my experience, the biggest risk tends to lie in the areas where capital has been most extended, whether it was subprime in 2007 or the fiber built out during the dot-com boom. And in this cycle, AI capex and government debt are top on my list. On AI, the biggest risk in my view are algorithmic improvements that increase compute efficiency, similar to what multiplexing did in the dot-com years.
Multiplexing allowed dozens, then hundreds of wavelengths to travel down a single fiber, adding to the oversupply of fiber in the 2000s. And secondly, private market AI funding could pull back as monetization is sluggish among intense competition of AI providers, similar to the dot-com companies running out of cash in the early 2000s. Both would mean a potential sudden decrease in the demand for compute and a temporary oversupply.
Yet with AI adoption increasing and monetization still early, these risks do not seem imminent. On government debt, a possible risk continues to be a buyer strike in the treasury market, especially if the US deficit keeps increasing. Yet if you look at the macroeconomic conditions that have historically helped contain deficits, it's been capped, but above-trend inflation, a benign rate environment, and strong nominal growth with productivity gains.
In other words, conditions where the economy is growing faster than the cost of capital, the conditions we expect to see over the next six months. With this, I wish you very happy holidays. Stay well and stay ahead.
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