Top of the Morning: CIO Equity Pulse - Monthly performance update & outlook
Per the full note from UBS, the U.S. equity market remains poised for growth driven by three core elements highlighted by David Lefkowitz. Central to this expectation is the impending second-quarter corporate earnings season, where a number of companies are projected to exhibit solid results despite prevailing economic uncertainties. This insight can guide FX traders, particularly those focused on dollar pairs, as stronger equity performance may bolster USD demand due to improved investor sentiment and risk appetite.
What the desk is arguing
The desk frames this as a pivotal moment for U.S. equities, underpinned by robust corporate earnings expectations for Q2. David Lefkowitz elaborates that these earnings will be influenced by several macroeconomic factors, including ongoing inflationary trends and geopolitical developments affecting market stability.
In recent times, the equity market has shown resilience, and this is substantiated by the expectation that operating margins will outperform current market forecasts. If corporations can surpass anticipated earnings, it could lead to a significant uptick in stock prices and support a continued bullish sentiment across the markets.
Where it sits in our coverage
With a consensus target of 1.075 for the USD pairs we are tracking, the desk is aligned with jpmorgan at a 1.10 target for March 2026, signaling confidence in the dollar's strength against a backdrop of strong equity performance. Conversely, bofa holds a more cautious stance with a target of 1.04. This places our outlook snugly within the existing variance among major firms, leaning closer to the upper bounds provided by strategists aligning with bullish equity scenarios.
How other firms see it
Firms like jpmorgan and goldman support a bullish narrative for U.S. equities, expecting strong corporate performance to reinforce positive market dynamics. On the contrary, bofa is accompanied by deutsche, which maintain a more bearish outlook amid potential economic headwinds.
Traders should closely monitor movements in currency pairs such as USD/EUR, as the U.S. equities' performance could have spillover effects on dollar valuations. Furthermore, indications from the Federal Reserve concerning interest rates may also play a critical role in shaping market trajectories in the coming months.
01US equity markets bolstered by strong corporate earnings outlook
02Robust corporate earnings could enhance USD demand
03Inflationary pressures remain a key risk factor
04Traders should watch USD/EUR for potential volatility
Market implications
Watch for USD rallies against major currencies contingent upon strong earnings reports in the upcoming months. A sustained movement above the 1.075 level could signify increasing confidence among investors, thereby reinforcing the greenback. Major companies' earnings surprises could be influential.
Risks to this view
Should companies fail to meet earnings expectations, or if geopolitical tensions escalate, this could significantly weaken market confidence and reverse the current bullish equity sentiment. Additionally, any shift towards a more dovish stance from the Federal Reserve could also put downward pressure on the dollar.
ubs
Hi everyone, Dan Cassidy here, welcome back to Top of the Morning on the UBS Market Moves podcast channel. Today I am joined in the 1285 podcast studio in New York by the Head of Equities for the Americas from the UBS Chief Investment Office, David Lefkowitz. As you our listeners know, we have been producing the CIO Equity Pulse.
It's our fourth episode now, David, which ties into the UBS House View publication suite. You're joining us to talk about the equities updates for the upcoming issue in August. So it's great to have you here at the table, our first studio appearance together.
So David, welcome to the new podcast studio. Thank you. Yeah, it's great.
It's great to be here in person. I'm looking forward to the conversation, Dan. So let's dive right into it, David.
Over the last few months, you've been highlighting the three bull market drivers. They are solid growth, supportive Fed, and AI adoption. So as a starting point, David, it might be helpful for our listeners to hear you provide an update on each of these items, given that earnings season has just kicked off as well.
Let's begin with that. Perfect. I think that's a great place to start.
And just to get to the punchline, I mean, there's really no major change in our thinking. Just think the bull market is still intact. I think we will see higher stock prices over time.
But yeah, let's talk about the growth environment because as you point out, we are just at the early stages of second quarter earnings season and the story is really good. I mean, so we think we're going to see 28% earnings growth for the S&P 500 this year. I'm sorry, this quarter and that's going to be the fastest in more than four years.
We're expecting sort of a normal level of earnings beats. What I would really say is, I mean, that 28% is actually very high, right? And earnings are really firing on all cylinders.
So let's talk about each of those cylinders a little bit. I mean, you've got – clearly you have AI, right? And where that's showing up on the earnings is really in semiconductors and semiconductors are accounting for about 40% of the growth that we're expecting in the quarter.
So yeah, really strong and I would say kind of supercharging the numbers. But we're also seeing broader participation. So manufacturing and cyclical sectors are also starting to contribute and that's sort of a leg of the stool that we haven't had on earnings and that's starting to come through.
And just to underscore this, what's happening in manufacturing, we actually have seen job creation resume in manufacturing this year and that's a big change. The last three years, the manufacturing sector have been shedding jobs. So I think that just gives people a sense of like, yeah, things are getting better in the manufacturing area and that's now showing up in earnings as well.
And then look, the consumer continues to be pretty solid and that's because the labor market has been fine. So yeah, ultimately I think we're going to see a good set of numbers now. We're talking here first week of earnings season.
The banks have been the ones that we've heard from so far. And I would say so far, it's just been confirmation of our expectations. They've been solid.
Consumer spending has accelerated actually. Charge-offs lower. Loan growth has been actually really good.
And the investment banking business is really strong. I mean, both from investment banking M&As and advisory businesses as well as capital markets. So it's a really robust picture for earnings and that's clearly a key positive driver for equities.
David, as you pointed out, Q2 earnings off to a strong start. We've been hearing from some of the big banks, the financial names, haven't yet received many results from the tech companies. But tell us about your current thinking on AI.
I think it's helpful to take a step back a little bit when we think about this whole AI story. And I would say the big picture on AI is that really since the launch of ChatGPT nearly four years ago, there's just been a very substantial supply-demand imbalance in AI infrastructure. There's been a lot more demand for the chips, the equipment, the – I mean, it's especially chips.
The power – I mean, there's a whole laundry list of components that go into building out the AI infrastructure. And in general, there's just been – the supply has not been able to keep up with the demand. And I think that's going to continue to be the case.
So what gives us confidence here is that look at all the capital that's being raised by these mega-companies, both in the private markets and increasingly the public markets. All of that is just going to get recycled into more spending on AI infrastructure. And so the other thing I would also point out is that we watch very closely just any indications of supply-demand in AI infrastructure, GPU rental prices, so the prices to rent the semiconductors that run AI and train AI, those continue to go up.
And that's, I think, the best indication that we remain in a very supply-constrained environment. And so – and it's hard to bring on new supply very quickly across a lot of these different segments. So I think we're going to see continued supportive trends from the AI complex.
There has been a lot of volatility in semiconductors especially. I think a lot of that is due to positioning. Let's not forget, they had a huge run earlier in the year, I mean, just like sort of epic to some extent, I mean, records in – and yeah, so we're seeing some digestion there.
But I don't think there's really been any change in terms of the fundamentals and the demand outlook. So I continue to think AI will be supportive for earnings and for the market overall. Not to get off the beaten path, but just to clarify the concerns earlier in the year about the potential AI bubble, drawing comparisons to the 2000.com bubble.
Has it materialized? You haven't seen signs of that. That is sort of a key risk, right, in terms of will this boom turn into a bust?
And I would say the short answer is we don't think it's going to – it's happening now. I mean, again, just pointing out the fact that there still is a very clear shortage of some of these key components and demand continues to outstrip supply. I would get a lot more concerned if, say, the Fed was really moving to start hike interest rates or they were really clear – and that would – because that would shut off or certainly impair companies' ability to raise external capital, which is financing a lot of the demand.
We don't think that's likely in the cards. And – or if we – for some reason we see just supply-demand getting into better balance, whether it be less demand, maybe there's algorithmic improvements that we don't need as many chips as we thought or there's less usage for some reason of the AI models. But that's the key in my mind is supply-demand on AI infrastructure and right now we're still in a shortage situation.
You brought up the Fed. It's interesting. Commentary from Fed officials seems more hawkish since Fed Chairman Kevin Warsh took his seat.
Yeah, I would agree. It's definitely been a notable change and it's not just – it's not just Kevin Warsh. I would say there's been other Fed officials that have come out and been a bit more hawkish.
So when – getting back to your original question, Dan, about sort of the three legs of the stool of this bull market, we talked about growth, we talked about AI, I think things have shifted a little bit on the Fed. And what I – what caught my attention earlier this week, Governor Waller who's a governor on the board, he tends to be a bit of a leading indicator about where – what the Fed is thinking in terms of their next policy moves and he had a pretty hawkish set of remarks earlier this week. Now that was before the inflation print that we got, which was cooler than expected.
So that was good. But he was very clear. He basically said that if inflation doesn't improve, rate hikes are looking more likely.
And so that's where we are, right? So I think the good news is inflation is improving. We got that pretty soft inflation report earlier this week and we think the inflation data should continue to improve.
The tariff impact is fading. That came through in the inflation data and we got some assist from energy. Look, energy is – it's hard to predict what's going to happen with Iran and all this other stuff.
So that remains a wild card. And now, look, I think the good news though, if we really take a step back, look, I would say if the Fed – that's not our base case. We think the Fed is on hold for this year and ultimately, we will do some rate cuts next year.
But let's just say inflation remains too high and they do decide to hike interest rates. I think it would be – we've been looking at a couple of rate hikes. That's something really substantial.
Look, that could cause some volatility in equities but I don't think it would end the bull market. I think I would be much more concerned if we were looking at a string of rate hikes that really – as we were just talking about on the – how this relates to AI. If it started to really crimp access to capital and we saw therefore less demand for AI infrastructure, that would be a big negative.
I don't think that's likely. But that is one of the things that we watch very closely. We've been very US-centric.
If we step outside of the US, take a look at non-US markets, what types of performance trends have you been picking up there? David, any updates you can share with our listeners? We haven't really talked about non-US markets, Dan.
So I'm glad you brought that up. But we've been generally positive, not just in the US but also outside the US and we actually increased our positive view this month where we upgraded Europe. It's really sort of the same kind of similar story.
We're getting a cyclical improvement. We talked about that manufacturing improvement here in the US. We're seeing something similar really around the world and Europe is a cyclical market.
They have a lot of companies that are more leveraged to the global industrial cycle. On top of that, Europe is investing in defense. They do have some – especially on the industrial side, companies that are leveraged to the AI infrastructure build out.
There's a lot of industrial companies that do sell equipment that goes into data centers and things like that. European companies, we've seen some cost discipline as well. And inflation is looking a little bit better there and kind of around the world.
And the European Central Bank is not likely to hike any further. So that's looking more interesting to us. We also upgraded India.
Similar story, just earnings improvement. We've been positive on emerging markets and we've been positive on global equities broadly. Like I said, it's really sort of a similar concept here.
You have a cyclical improvement in the cyclical parts of the global economy, especially in manufacturing and things like that. And there's a big investment spending boom related to AI, but also related to other things that we just talked about, like defense and stuff like that. And that's really happening in various parts of the world.
You know, we've touched briefly on a couple of risk considerations. But just to recap, David, what's top of mind for you that could perhaps disrupt your performance expectations for U.S. equities? The good news is we already covered most of them.
So I think, look, I think risk number one and two are, are we going to overbuild data centers? Right. And I don't think we're there yet.
But that is sort of risk number one. Related to that, I would say is, are we going to get a significantly more hawkish Fed, which could drive a reduction in demand or make it more difficult to raise capital? Don't think that's likely either.
Yeah. But then, look, obviously geopolitics, the Iran war. Those are always things that, who knows?
And then, yeah, we do have an election coming up, right? So I'm sure we'll have lots more to say about that in the coming months. But yeah, I don't, don't think that's a, that's a big risk.
But I think the market is going to be watching to see how well some of the more left or left leaning parts of the Democratic Party do in this election to get a read on what that means for 2028 and how that could eventually impact policy more in 2028 and beyond. But, you know, we don't think there's going to be major policy implications coming out of this upcoming election. Okay.
So a range of risk considerations to be mindful of. Thank you for that, David. Let's close out with positioning per the latest UBS House view.
Remind our listeners about CIO's current positioning views when it comes to U.S. equities. Yeah. So here, there's been no change.
We've been really emphasizing that we think investors should have broad exposure to the U.S., not just tech, and make sure you don't have overly concentrated positions because, because the opportunity set is getting bigger now, right? We talked about sort of the cyclical parts of the economy getting better. So we have, I would say, a mix of cyclical and secular sectors that we like.
Just to highlight a few, I mean, on the cyclical side, industrials, financials, consumer discretionary, but also, you know, have some defense, right? I mean, healthcare, which is actually have been doing really well, and utilities we like as well. And as we've been regularly highlighting here, we also think have exposure to the secular trends and these innovation drivers.
And that's related, and we have specific stock lists related to AI, related to electrification, we call it power and resources, and related to health tech, we call it longevity, but I would say it's health innovation, because innovation drivers are what really generate shareholder value over time. And so we think it's important to have exposure there. But overall, I would say main message here, Dan, is that we think the bull market is intact.
The growth is good. The central banks don't look like they're going to be a headwind. And we think the AI story still has room to go.
David, always a very helpful touch base. Thank you for dropping by Top of the Morning. Great to do this in person, by the way.
I love it. And we'll do it again next month. Awesome.
Good seeing you, Dan. Likewise. Thank you, David.
Again, today, we've been speaking with David Lefkowitz, the head of equities for the Americas from the UBS Chief Investment Office. And this has been the CIO Equity Pulse, a monthly equities-based conversation with David, which ties right into the latest UBS Houseview publication suite from the UBS Chief Investment Office, which can now be located up on ubs.com slash CIO. For clients of UBS, please reach out to your UBS financial advisor if you would like to receive a copy of the latest UBS Houseview Investment Strategy Guide directly.
From UBS Studios, I'm Dan Cassidy. Thank you for joining us. Thank you for tuning in.
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