Top of the Morning: CEO Macro Briefing Book - 4Q25 update

Hi, everyone. Dan Cassidy here. Welcome back to Top of the Morning on the UBS Market Moves podcast channel.

For today, we are continuing with our ongoing series of conversations covering the CEO Macro Briefing Book Series from the UBS Chief Investment Office. For today, covering the Q4 update. Joining me right here in studio in 1285 here in New York.

Glad to welcome back the leading contributor to the series, Paul Hsiao, Asset Allocation Strategist for the Americas with the UBS Chief Investment Office. Paul, thank you for dropping by. Nice to have you back here at the table.

My pleasure. Thanks for having me. Absolutely.

And I do want to point out that the CEO Macro Briefing Book Series is available for our listeners and clients up on UBS.com forward slash CIO for your reference. But Paul, I know we have a lot we want to cover with our listeners this morning. Let's dive right into it as we're now making our way through Q4.

Curious from your vantage point, what does the macro economic environment look like here in the U.S.? And further, are tariffs having the effect some economists perhaps feared earlier in the year? That's a great question.

I know that for a lot of our listeners this year can appear quite volatile. But from the broad macro strokes, from our vantage point, it's actually quite similar to the last couple of years where you started off with great expectations as a lot of market participations do. There seemed to be a growth scare or an external shock in the middle of the year, but expectations start to recover.

So in this year, we started optimism quite high following the election. I know it seems just one year ago that there was an election. And then we had the tariff shock.

And then we had GDP forecasts go down. Some people forecasted recession. And then now GDP is actually looking quite good.

The Atlanta Fed GDP tracker was tracking Q3 GDP around an annualized rate of 4%. I think mechanically that has to push up annual GDP to around close to trend when we thought this year would be much below trend or even close to recession territory. So we have in one of our books sort of a regime tracker of where we are.

And we've been solidly in the reflation scenario for quite some time, which shows some elevation in prices, but I think also supports reflationary assets that you've seen markets reach new highs in the last week. So let's talk about financial markets a bit, Paul, as we're speaking right now on Tuesday, October 28th. We're coming off of another positive session.

We saw in U.S. markets yesterday. We continue to see this momentum in U.S. equities as we're making our way through the Q3 reporting season. This market momentum, is it justified or is this euphoria?

Is there a bubble in the markets? That's a recurring question. Right.

I think we're going to hear the word bubble more and more often as we go into later this year and perhaps 2026. I think at a glance, it does seem that parts of S&P are quite overvalued, reminiscent of the tech bubble. NASDAQ certainly has done quite well this year.

Independently, the S&P has done, I think, double its annual averages, although it's lagging behind some of its peers, but it's overall a pretty good risk on mood right now. But from our vantage point, one thing that does justify this versus 2001 is that earnings have been supported, right? Nvidia is a big driver of revenues and the Mag 7 is having a greater and greater share of overall revenues in terms of percentage of companies in the U.S.

So that's the difference that we're having here. And then our earnings expectations, at the first start of the year, after tariffs, we thought that they would be flat, right? We've been constantly revising them up, which have been pushing up price targets as well.

So I think earnings season, the last two have been surprising to the upside. It does look like Q3, the momentum is standing, but it's certainly earnings from parts of the Mag 7 has become as important as a macro story. Because right now, even with this sort of more optimistic mood, it's good to remind ourselves that we are in the middle of a government shutdown right now and some data releases have been delayed.

So a lot of the econ front, we're flying a bit blind. So investors are looking towards earnings season to really gauge where we are. And it will be interesting to hear from some of those key Mag 7 names reporting this week, again, as we're recording here on Tuesday, October 28th.

You mentioned the government shutdown, Paul, that's top of mind for many. Policy in general, policy perspective out of Washington, D.C. is something investors continue to track very closely. What can we expect to see from the White House as we progress through Q4 here?

I think there are a couple of things to keep in mind. And we view policy as supportive as we go into the final quarter of the year and towards the first half of 2026. So obviously, we did have tariff volatility in the beginning of this year, but markets seem to be a lot more resilient to it as we go forward, or at least more used to it.

For example, in the last week, we had increased trade tensions with Canada, but also a framework of a deal with China, but markets rallied. So I think a lot of people are looking past the volatility to see what sort of new environment can we actually end up in. It's a reminder that 2026 is also a midterm year in the U.S., so the White House is incentivized to at least maintain a pro-growth stance going into the next year.

But even moving on from just policy from the White House, but on the monetary policy front, we did have rate cuts begin again in September. We expect several more this year, and then a couple more perhaps next year, too. The market is even more dovish, I think, expecting about five more rate cuts through 2026.

And I think that certainly might become the case if the White House is successful in replacing Jerome Powell in what they and the market would consider to be a more dovish head of the Federal Reserve. And I think that's something that we should pay attention for in the next coming weeks. So when you think about the macroeconomic environment, markets, what they are today, the progression of earnings, and of course the policy environment in D.C., a lot for business owners to be mindful of.

We've covered a lot today, Paul, though anything else business owners should keep top of mind at the moment? Yeah, I think under the surface of this sort of more optimistic pro-growth environment, there are three things that business owners should keep in mind. But on the tactical front, we've talked about some of the tailwinds from policy.

I think one thing is that over the next six months, we should really see the pronounced stimulative effects of the O-triple-B-A that has been passed earlier this year. So those refunds on policies like tax and tips, that should be a benefit for the consumer going into Q1 2026, and that should support consumption and growth. Speaking of the consumer, one thing that we are paying attention to is that it is increasingly looking K-shaped and more unequal.

So the top consumers are doing quite well and you see more pockets of stress in bond consumers. Since the top part of consumers is driving the majority of growth so far, it does look somewhat sustainable even if we have a slowdown or more layoffs happening. That's different than other cycles.

And the third thing is that when it comes to business investment, whether looking at the GDP accounts or even venture dollars, the narrative still is very, very AI-driven and I think that's a market narrative that will last until 2026. So for businesses looking to raise capital, they have to compete with all these AI names that are still looked at with high demand in the market. Well, Paul, thank you for dropping by to keep our listeners, our business owner clients informed on the macroeconomic environment, the policy environment, a very productive session today.

I know we'll revisit our conversation in a couple of weeks for the year ahead. So with that, Paul, thank you again for dropping by. We've been joined today by Paul Hsiao, Asset Allocation Strategist for the Americas with the UBS Chief Investment Office.

Again, for our clients of UBS listening in, please be sure to reference the latest CEO Macro Briefing Book Edition, the Q4 update, which is available for you now up on ubs.com forward slash CIO from UBS Studios. I'm Dan Cassidy. Thank you for joining us.

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