Top of the Morning: CIO Equity Pulse - Monthly performance update & outlook
The desk maintains a bullish outlook on US equities, citing ongoing favorable conditions that should continue driving performance. Per the full note from UBS, CIO David Lefkowitz indicates a positive sentiment towards the equity market amidst various factors such as potential new equity issuance and expectations surrounding Fed policy under Chairman Kevin Warsh. With the current trajectory of US equities, there are no imminent high-impact events for currency movements in the short term that would disrupt this view.
What the desk is arguing
The desk argues that current market sentiment coupled with favorable monetary policy is likely to buoy US equities. According to the UBS commentary, the emphasis on both IPO activity and a positive outlook for US equities suggests a bullish environment in the coming months.
CIO's positive stance on the market is rooted in both macroeconomic indicators and investor sentiment that favors equity positions as new issuances can often signal increased confidence in the market. This aligns with the observed trends in equity performance, especially as investors await guidance from the Fed.
Where it sits in our coverage
Our consensus target for the pair sits at 1.075, with a range between 1.04 and 1.12. Notable targets include: - jpmorgan: 1.10 (Mar26) - bofa: 1.04 (Mar26)
This perspective is at the upper end of the consensus spread, reinforcing a bullish sentiment compared to more cautious viewpoints held by others.
How other firms see it
Firms like jpmorgan and bofa exhibit diverging sentiments, with JPMorgan taking a more bullish stance while BofA adopts a conservative outlook on growth. The former views equity performance as supported by underlying conditions, while the latter expresses skepticism regarding sustainability.
The discussion around interest rate policies from the Fed is crucial here, especially as it relates to the USD and how changes might impact currency pairs such as EUR/USD and USD/JPY, keeping traders alert to the effects of US monetary policy on global equities.
01UBS maintains a positive outlook on US equities aided by favorable monetary conditions.
02Potential new equity issuance may signal increasing market confidence.
03Current trading conditions show no immediate disruptions expected in the equity landscape.
04Observations on Fed policy should be monitored closely as timings could affect equity performance.
Market implications
Traders should monitor the performance of US equities closely, especially as any fluctuations in investor sentiment can lead to broad implications for the USD. Key to watch will be positioning around the 1.075 level as a benchmark for potential upside in the equity market.
Risks to this view
A shift in monetary policy by the Fed could invalidate this bullish outlook, particularly if unexpected rate hikes occur that could dampen market sentiment. Additionally, if new equity issuance fails to meet expectations or if IPOs receive tepid reception, this could adversely impact the equity landscape.
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Hi everyone, Dan Cassidy here, welcome back to Top of the Morning on the UBS Market Moves podcast channel. We are back with another episode of the monthly CIO Equity Pulse with David Lefkowitz, Head of Equities for the Americas from the UBS Chief Investment Office. On a monthly basis, we catch up with David for a performance update and outlook for U.S. equities.
We also discuss themes, positioning, as well as risk considerations. And these conversations do tie in each month with the release of the latest UBS House View from the Chief Investment Office. So with that, David, thank you for dropping by on this Friday morning.
Nice to have you back here on Top of the Morning. And our conversation today also coincides with a big week for New York sports. Yeah, it's my pleasure, Dan.
And go Knicks. I don't know. Just been in the Knicks spirit here in New York.
So well, the parade had a great turnout yesterday, so that was great to see and a good time for New York sports. Indeed. Feels like it's been a long time.
So, yeah. Exciting times indeed. So, David, let's bring our listeners up to speed a bit.
CIO just published the monthly House View publication. Since we last spoke back in May, David, have there been any changes to CIO's thinking on U.S. equities? Yeah.
So, Dan, I would say not really. No. I mean, our main message has been we think there's further to go in this bull market.
And the main drivers that we've been really trying to emphasize over the last couple of years now are all in place. We have resilient growth, and you could look at GDP growth, but especially what equities matter or care about most is profit growth. And profit growth has actually accelerated this year.
So growth is good. We've had what I would call a supportive Fed, which has, I think, been an important ingredient. And if you just look at those two in conjunction, good growth, supportive central bank policy, the good performance we're seeing in stocks makes complete sense.
And then you sort of layer on top of that the truly tremendous amount of investment we're seeing in AI, which somebody's investment is somebody else's revenues, right? So that's clearly adding to the profit growth that we're seeing. But those have been the drivers that have been in place really since late 22, and we think they're still in place, solid growth, supportive central bank, and AI.
And I would even highlight that on the growth side, we talked a little bit about it, but forward estimates so far this year, they're up more than 15%. So the bottom-up consensus estimates for the S&P 500 have risen 15%. The stock market's only up 10.
So it's not even keeping pace with the truly explosive nature of earnings growth that we're seeing. And also, I know tech gets a lot of the spotlight for understandable reasons, but if you look at the equal-weighted index version of the S&P, the equal-weighted, so every company gets an equal weight, as opposed to the market cap-weighted version that people typically talk about, where the largest companies have the largest weights, those two, the equal-weighted and the market cap-weighted, are actually performing identical, right? So this is a pretty broad-based move higher we're seeing in stocks, and I think it reflects all of that good stuff we were talking about, growth, central bank, and AI.
With that, David, let's talk a bit about the Fed. You mentioned that the Fed is a key part of the bullish case for equities. How are you and the team thinking about Fed policy now that Kevin Warsh is the chair?
Yeah, I think this is a really important point, Dan, because obviously we just had the first press conference for the post-FOMC meeting where Kevin Warsh was the chair. And look, it was more hawkish than I think we were expecting and most market participants were expecting. And I think it's fair to say that there are now some higher odds of an interest rate hike.
But I'd also say that that's not our base case. And look, inflation is higher than target now, and Chair Warsh spent quite some time explaining that it's been higher than target for now an extended period of time, like five years. But we also think right now a lot of the contribution to that above-target inflation is coming from temporary factors like tariffs and like what's going on with energy because of the Iran war, which thankfully looks like it's sort of winding down.
So as those tariff and energy price increases either stop going up or in some cases begin to reverse, we should see inflation come back down. And so that gives us confidence that we are not going to see Fed rate hikes this year. In fact, we think we'll see Fed rate cuts sometime in 2027, early 2027.
We'll see how it goes. But look, I mean, if the Fed did start hiking rates, I think that is an incremental headwind. But then I also think it's important to bear in mind, you know, would this just be some calibration, what I would call calibration hikes, right?
Like, you know, a hike or two shouldn't have a really profound impact on the environment. Or is it going to be something more aggressive where they really hike, you know, three, four, five, six times and you see things like the yield curve invert and stuff like that? That would be very clearly, I think, a stronger headwind for equities.
And so but that seems pretty unlikely, that latter, you know, more aggressive stance. So look, it could be a little bit of a headwind if they do hike rates a couple of times. But that's not part of our base case.
And you know, at this point, don't think the Fed policy is going to derail this bull market. Well, that's helpful clarity, David, given how monetary policy, the outlook there has been top of mind for many. Since you're here, David, I want to point out to our listeners, you published a report just a few days ago that takes a look at how much new equity issuance there could be this year from both IPOs and existing companies.
Can you walk our listeners through the main points of that report? Yeah, happy to do it. I mean, we've been getting a lot of questions on this.
So we do think that issuance this year, whether it be from new companies or existing companies or new public companies, I should say, it will be a record in absolute terms. And there's been a lot of media about this. But I think you really need to look at the issuance relative to the size of the equity market.
And the equity market is really big. So right now, as we speak, Dan, you know, it's about it's about $72 trillion in size. And so the issuance that we're expecting is it's probably going to equate to about one percent of that $72 trillion.
And that's higher than we've seen in the last couple of years. But it's really pretty much in line with the average if you look over the last 35 years going back to 1990. So I'm not too worried about the issuance from that perspective.
It doesn't look abnormal relative to the size of the equity market. On top of that, we also think it's important to point out that companies are still buying back stock. Yeah, tech is is probably buying back and in fact is buying back less stock.
But other sectors are increasing buybacks, especially financials. And so we actually still think that buybacks are going to be larger than new equity issuance. And right now, buybacks are running at about a one point two trillion dollar rate.
And so that's that is going to be bigger than the issuance that we expect. So, you know, I'm not too worried about the issuance. I think it's important to keep it in perspective relative to the size of the equity market relative to other corporate actions such as as buybacks.
And I guess a final point here is that when we look at the data, IPO activity just tends to be a coincident indicator. It doesn't usually signal any anything alarming about the forward outlook. Activity tends to rise and fall with markets.
So I don't think what we're seeing so far and what we anticipate, I don't think that's going to be a headwind to to the bull thesis for stocks. David, I just want to point out the publication name to our listeners, our clients. It's a closer look at equity issuance, which is now available up on UBS.com slash CIO would definitely point our listeners, our clients to that report to read further into this.
But thank you, David, for those highlights. Let's talk a bit about risk considerations that could perhaps disrupt your performance outlook for U.S. equities. What's top of mind for you at the moment?
Yeah. So, Dan, I would I would put, you know, let's talk about like the small risks first. You know, these are things that, you know, could could drive a little bit of volatility, but not a change in the overall environment.
I think the election probably falls into that category. I don't I don't think we're going to see any meaningful change in policy almost regardless of the election outcome. Just because, you know, the president is still going to be the president.
And and so, you know, even if Congress changes hands or one house of Congress changes hands, you know, there's not going to be much change in policy. But the bigger risk, I would say, you know, something that really could change the environment. You know, we talked about inflation and the Fed.
I think that's very much still very important that if inflation were to pick up and that prompted an aggressive response from the Fed, that that would definitely be negative. So we need to see. Therefore, we really do need to see this.
I think this Iranian agreement and getting energy flows restored is important. And, you know, there is a little bit of uncertainty around how that plays out in the coming months. So we'll have to watch that.
I would say the other big risk in my mind is, you know, at some point, do we do we just overbuild these A.I. data centers? Right. Do we just have a glut of them because there's so much money being spent?
And I mean, at this point, I don't think that's a big risk. You know, if you talk to any company, everybody is still compute constrained. Everyone is short compute.
They're still scrambling to get their hands on these resources. And if you look at the prices for renting a GPU, those have been rising all year. So I just think it speaks to the current environment where there's still a shortage of data center capacity.
But but if there is a day when when we have a surplus of that, that that would be a very substantial change in the environment and probably a big headwind for all the A.I. infrastructure names. And so that's something we watch very carefully and very closely. But don't think that's a that's a risk to worry about in the coming months and quarters.
OK, so a range of risks there to be mindful of. Now, as we close out, David, from a positioning standpoint, what is CIO currently recommending? Yeah.
So from a sector perspective, I would say we we have a mix of some defensives and some cyclicals. I think, you know, now, especially with the straighter harmonies looking like it's going to be a little bit more free flowing, I think focusing on some of the sectors we like that are more cyclical, such as consumer discretionary financials and and industrials makes a lot of sense. But as always, you do want to have some.
Diversification, so we like health care, we like utilities, you know, on tech, I mean, we're not negative on it. We think investors should have a full allocation there, but also make sure you don't have overly concentrated positions in some of the recent really strong winners. And then, you know, we continue to like our transformational innovation opportunities.
These are three model portfolios that are aligned to one is on AI, one is electrification, which we call power and resources. And the third one is on longevity, which is basically health tech. So and those, you know, we think it's important to have an active approach in all those three segments of the market.
And so that that really speaks to taking a look at the model portfolio. So that's that's how we're positioned. But the overarching message is is, Dan, that that we think there's more to go in this bull market.
And I don't think I stated it at the outset, but we do have a we do now have a June of twenty twenty seven price target. So that's about a year away, which is eighty two hundred on the S&P 500. So still, you know, decent, healthy upside from where we are right now.
Well, David, this is always a very helpful touch base for our listeners, our clients, keeping them informed on a monthly basis of CIOs thinking when it comes to equity market positioning, as well as risk considerations and an overall performance outlook. So thank you, David, for dropping by top of the morning for this month's edition of the CIO Equity Pulse. Yeah, thank you, Dan.
We'll talk next time. Thank you, David. Again, we've been joined today by David Lefkowitz, head of equities for the Americas from the UBS chief investment office.
To you, our listeners, I want to again point you to the two publications David has been making reference to on today's episode, the latest monthly UBS House View from the chief investment office, as well as the report, a closer look at equity issuance of both of these reports are now available for you up on UBS dot com slash CIO from UBS Studios. I'm Dan Cassidy. Thank you for joining us.
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