Top of the Morning: CIO Strategy Snapshot - An exceptional debate
The desk is cautiously optimistic about the resilience of US equities following one of their strongest weeks of 2025, driven by optimism around tariff reductions and positive earnings reports. However, macroeconomic uncertainties loom large, leading to questions about the sustainability of US exceptionalism, as highlighted in the UBS commentary. With the S&P 500 up 4.6% and the Nasdaq up 6.4%, evidence suggests that market movements were largely technical rather than fundamental. This dynamic prompts a reevaluation of positioning among hedge funds and systematic strategies, suggesting that while there is upside momentum, severe underlying risks remain prevalent. Per the full note from UBS, volatility metrics such as the VIX dropped significantly, indicating reduced market anxiety, although caution is warranted given the mixed signals present in the broader economic landscape.
What the desk is arguing
The desk posits that while US equity markets experienced a significant rally last week, the underlying macroeconomic uncertainties call for restraint in investor enthusiasm. Per the full note from UBS, investors may be prematurely optimistic about ongoing US exceptionalism amidst an evolving economic backdrop.
Supporting this view, the S&P 500's 4.6% gain and the Nasdaq's 6.4% rise suggest a rally predominantly driven by technical factors and short covering rather than solid fundamental improvements. The VIX falling nearly five points to 25 indicates a possible reduction in perceived risk, yet the desk remains vigilant regarding potential volatility spikes in the near term.
Where it sits in our coverage
UBS projects a modest target for the USD at 1.075, with a range between 1.04 and 1.12, covering perspectives from major firms. Notable December targets include: - jpmorgan: 1.10 - bofa: 1.04
The desk's outlook aligns closely with jpmorgan, sitting towards the upper bound of the expected range, reflecting a more bullish sentiment compared to bofa’s lower target.
How other firms see it
Several firms echo the cautious optimism regarding equities but differ on the degree of sustainability in the current rally. Aligned firms include jpmorgan, supporting a stable bullish outlook, while bofa takes a more contrarian stance, foreshadowing potential volatility.
Other related insights suggest that currency moves, particularly in USD/JPY, will be influenced by broader equity trends and Federal Reserve communications regarding monetary policy adjustments.
What the calendar says
Currently, there are no high-impact events on the calendar that could directly impact the near-term dynamics of the FX landscape.
01US equities saw one of their best weeks in 2025, with the S&P 500 and Nasdaq gaining significantly.
02Technical factors, particularly short covering and reduced market volatility, contributed to recent gains.
03Macro uncertainties remain prevalent, prompting caution about the sustainability of current bullish sentiment.
04Investors should remain alert to potential volatility spikes despite the current positive trajectory.
Market implications
Watch for indicators of volatility, especially around the VIX level at 25, and monitor how positioning shifts could impact upcoming trading, particularly with the USD/JPY dynamic reflecting underlying equity sentiments.
Risks to this view
Key risks to this outlook include unexpected shifts in macroeconomic data or sentiment that could trigger a flight to safety, particularly if the Fed signals tightening measures, which could reverse recent gains in equity markets.
ubs
Hi, everyone. Dan Cassidy here. Welcome back to Top of the Morning on the UBS Market Moves podcast channel.
U.S. equities had one of their best weeks of the year, lifted by optimism about tariffs being dialed back, as well as decent corporate earnings reports. Joining us on this Monday morning for the CIO Strategy Snapshot to discuss this all. Glad to welcome back Jason Draho, Head of Asset Allocation for the Americas with the UBS Chief Investment Office.
Jason, great to be at the table with you to begin another trading week. Welcome back. Good morning, Dan.
Good to be here. It actually feels like it's a relatively quiet Monday so far compared to some of the prior Mondays we've had recently. And a lot of positives to talk about with respect to recent market activity, which we'll cover today.
So let's begin with that market performance, Jason. What exactly happened last week? What do you make of recent performance?
Well, it was certainly a positive week for the markets. One of the best we've had all year for U.S. equities. The S&P 500 was up 4.6%.
The Nasdaq was up 6.4%. The MAG-7 had its best week in three years, up 9.4% for the week overall. So very positive developments.
Volatility across the markets fell. The VIX fell nearly five points down to 25, its lowest since early April. Bond volatility also closed at its lowest level since Liberation Day in April.
Second, I mentioned the tech sector. Nasdaq did well. So AI-related baskets where a lot of them posted double-digit gains.
What was going on here? Well, certainly positive news flow regarding tariffs and the Fed. From a positioning perspective, you saw hedge funds doing more short covering, perhaps buying longs.
Some systematic strategies buying. I would say though that it was a little bit more of a technical story than it was a fundamental. And of course, more taking down left tail downside risks because of these policy pivots we'll get to in a second.
The incentive and overall thing amongst investors, certainly among institutional investors that we speak to here about remaining in a pretty bearish camp and believe that equities will go lower. But for one week at least, it was a bit of a reprieve. This week, depending on of course how the data plays out, but it has the potential to be like another positive week.
Or at least a lot of catalysts are coming up because we have 41% of the S&P 500 market cap is reporting. It's about 180 companies out of the 500 for the MAG-7 and we'll report. So again, these could be quite market-moving events.
And earnings have come in fine. Okay, all things considered. With the focus really on where do we go from here because there's a lot of concern about the data being backward-looking.
Which is why on Wednesday when we get to Q1 GDP estimate, the first estimate, it's going to be very noisy because of inventory, because of these gold imports that are going to distort the data. So the key thing to see is where is the private sector's final demand. That's the real kind of takes up the volatility.
And later in the week, we'll get also for March, the personal consumption expenditure data to see how our consumers continue to hold up. Which again, could pivot as we go forward but those are key data points. And then on Friday, maybe the most significant economic data point for the week is the April non-farm payrolls.
Consensus is around $135,000. So a number that would suggest still a solid labor market, not cracking, yet it's moderating bit by bit. A number well below that, in the $50,000 range, will certainly get investors concerned that the economy is slowing, that you're seeing signs of the tariffs.
That actually might be the bad news is good news if it gets the Fed to move more quickly, all else equal. A stronger number would be good, but it also means that policymakers, both fiscal trade with Trump and with the Fed may actually be incentivized to delay a little bit. So a lot of potential news that can move the markets again.
But last week, this was a good week for the first time in a while. Now, Jason, you mentioned that investors reacted positively to news flow regarding tariffs. We even saw Treasury Secretary Bessent on the morning programming today, consistent with that dial back tone recently from the White House.
You spoke a bit about the Fed as well. Is there reason to be optimistic, or are investors perhaps getting ahead of themselves? Well, at least in terms of the Fed, this time last Monday we were talking, there was the market reacting to these reports of Trump criticizing Fed Chair Jay Powell, saying they should cut rates.
Kind of calling into question whether the Fed independence, which of course the markets did not like last Monday. Later in the week, President Trump basically said he doesn't intend to fire Powell. So that sort of at least put that a little bit of a fire out for the time being.
So that was one factor. The bigger factor was the change in language, maybe the softening of tone regarding tariffs with both Trump, but also Bessent saying, with regards to China, that these levels are unsustainable. Basically, if tariffs are over 100% on either side, you effectively stop all trade whatsoever.
And there's evidence of shipping and shipping containers and lack of shipping that's already materialized. Like an embargo. Effectively an embargo, even though it's not official, but that's the practical effect.
So that's not sustainable. Certainly, there was reports of the CEOs of Walmart, Target, in meeting with President Trump and basically saying, if these stay in place and these levels, in two to three weeks, you'll see store shelves start to become empty and prices are going to go up. And that certainly kind of helped some of the language.
So that was probably the biggest deal, was some de-escalation. Now what the markets will want to see is signs of progress on negotiations between the administration and other countries. There were reports late last week that the administration has laid out a framework to negotiate with 18 countries, six every week, over three weeks, in a rotating fashion, until the 90-day deadline is coming up.
There's still a lot of negotiations in a short amount of time, but at least they're trying to give some guidance. There's a roadmap. There's a roadmap.
The roadmap has not been particularly clear, so signs of progress would be beneficial. Also today, this is Monday, April 28th, there's an election in Canada today. That will provide, obviously, some clarity of the governing, who's going to govern Canada going forward.
And once that happens, then the possibility of negotiations between Canada, the US, and Mexico could proceed. And it could happen relatively soon, at least in terms of meetings in Washington with the various leaders. So that's something else to kind of provide a potential pot of catalyst going forward.
But that's really what last week was. Briefly, challenging Fed independence, backing it off, but more softening of language on trade and tariffs. And that could continue this week.
But we will start to need, as investors, signs of progress relatively soon. So if we put tariffs to the side for a moment, Jason, the main market debate right now is about US exceptionalism and whether it can continue. This was actually a topic of the House View, the monthly letter from Chief Investment Officer Mark Hafley.
And your latest blog titled An Exceptional Debate. What are your thoughts on this particular debate, Jason? Well, the thing about this debate is it reminds me a little bit of this debate like a year ago, two years ago, like this, are we going to have a soft landing, hard landing, no landing?
People kind of tussle these terms. It's like, well, what do you mean? What do you mean by no landing versus soft landing?
Like you don't really kind of quantify it. And the same thing with this exceptionalism debate, like what does it actually mean? Like what are we talking about in some sort of more kind of quantifiable way?
So the purpose of my blog was to try and like say, how can we think about this exceptionalism? Is this by some sort of quantifiable metric? Is this ending or not ending?
Because that's really what matters, force of investment implications. You're just sort of saying it's ending, that by itself isn't very helpful. So in the note, I kind of highlight what I would say like at least four ways you can think about US exceptionalism.
From an investing perspective, there certainly could be more. It's not exhaustive. But one is like, what is actual US GDP growth compared to other countries?
And second is like, what is trend growth? Like kind of the structural long-term trend growth of the US versus other countries. And third is the return on capital invested in US.
You think of equity investments, but all investments, again, relative to your return on capital and investments elsewhere. And the fourth is kind of a valuation premium for US assets relative to the rest of the world. And so I kind of go through and try to give some perspective like what has made the US exceptional on all these four metrics and then could this continue or not?
I think for US growth, that's probably the one where it's clearest that exceptionalism is likely to fade. So in 2023, 2024, those two years, the US grew at an annualized rate of 2.85%. By comparison, the Eurozone grew at 0.6% and Japan at around 0.9%.
So at least almost two percentage points higher than Europe for two consecutive years, which is pretty significant. But if we think about this year, 2025, 2026, just taking consensus forecasts, what is expected, now in Bloomberg, the consensus for the US is to go at 1.5% and 1.6% respectively this year and in 2026. In Europe, it's 0.8% and 1.2%.
So now you're talking about gaps of 40 basis points, maybe 70 basis points, much narrow. So again, that exceptional growth for the rest of the world, that is converging. So I think that is fair to say that's sort of ending, at least temporarily.
But I think a key thing is really to me like this exceptionalism story starts to kind of hinge on things like long-term trend growth rate. Now, investors assume in the US it's about 2%. The Fed's official number would be 1.8.
In Europe, it's going to be sub 1.5% for relative perspective. The fact that the US is growing at nearly 2% for the past two years and even higher if you go to 2021 and 2022, that it did raise questions about, well, maybe US trend growth is higher. Maybe the neutral rate sort of associated with that is structurally higher.
We do know that a surge of immigration helped push up potential growth because potential growth or trend growth is based off of what is your growth of your labor force and what is productivity growth. Labor force certainly surged. We know that won't continue.
So that aspect won't continue. But that's something we knew back in January before the administration took place. And in our last update onto this growing 20s thesis we've been talking about for a couple of years that came out right around or right before the inauguration, we did say that it really would rely on productivity growth being elevated going forward.
And for the past two years or if you take the last five years, if you average it out, productivity growth in the US is around 2%, which would suggest trend growth of like 2.5%. Now whether that will continue, that's the open question. But that to me is kind of the key.
If that can stay high, if productivity growth in the US can stay high, that exceptionalism can continue. Tariffs, trade war, supply chain disruptions, those are not kind of positive for productivity. Creating uncertainty about all this path that maybe causes companies to delay investment, also not positive for productivity growth.
At the same time, AI developments will continue to come down the pipeline. We're going to get, of course, with the Mag 7, probably as they report earnings. Yes, they continue to invest.
This secular trend and theme is still very much in play. And if anything, it might incentivize companies if they have to deal with higher supply chains, more disruptive supply chains, is use technology to get more efficiency. So it can actually offset it all.
But that to me is like, I think to say that US exceptionalism is ending, I think it's part too premature. And just briefly on return on capital, it's structurally higher in the US by at least 5 percentage points, say, versus Europe. It's been bifurcating since the financial crisis in 2008.
Some of this reflects the nature of the companies, but it also kind of reflects that US management teams are very good at extracting profitability, efficiency gains. You have very kind of flexible and deep liquid capital markets, labor markets, I think that all sort of benefit US companies. A lot of growth opportunities are in the US that have high returns on capital.
That isn't likely to change anytime soon. And then finally on valuation premiums, people have paid a premium to own US assets, equities, credit, government bonds, even you could say the US dollar. That is certainly going to be dinged a little bit in the past month is consistent with that.
But I'd say it also has to be viewed in the context of two or three months ago, US assets were really expensive. The forward multiple in the S&P was at 22. Now it's down to 20. 22 puts you in like the 90th plus percentile.
This is elevated. And same thing with kind of other metrics. The dollar by most measures was expensive.
So I think before we sort of jumped into too many conclusions, these premiums are likely to come down, but this is maybe a bit of a reversion to mean as a first cut. What we need to see is even if you're holding constant the state of the economy, we're not going to recession. Do you see a further sort of derating of US assets?
And that to me would be a sign the market is actually taking that down. Go back to what we began with. Performance last week was good.
If it needs to be good, it's a sign that for all this talk, investors are still willing to pay up for US assets. And the last thing, I'd just go back to this long-term trend. Over the past month, the market implied measure for the neutral Fed funds rate, which is a function of growth, has not actually come down.
It stays around 4%. So if you look at some of the market pricing, it's actually not that consistent with the idea that suddenly US exceptionalism is ending. The one area where it is is with the US dollar, which has continued to weaken and may continue to weaken.
Well, Jason, thank you for weighing in with your thoughts on this debate. I want to point our listeners to Jason's blog, An Exceptional Debate, to read further into this topic available up on UBS.com forward slash CIO. As is the latest House View.
That's a good place to end on, Jason. I mentioned the latest UBS House View, updated as of last week. So can you walk us through the current main messages in focus and what CIO's main investment recommendations are today?
Well, sort of built in off of this sort of exceptionalism theme, you know, there's areas where certainly it could be challenged, but also things that I think you'd be premature to get too pessimistic, which is why like US equities, we kind of deem it as attractive on a more medium-term horizon. I think near-term, given how much they bounced last week, they may be bumping up towards kind of a top end of a range, just given that there's still a lot of uncertainty regarding tariffs, how this will play out. I think the markets are reacting positively with some justification to the news, but they're not cheap and we have not seen actually the evidence of the slowdown in growth, which is still likely to come, perhaps not until later in the summer.
So we got a bit of a reprieve, but I think the reality is the common united theme across the markets is that there's a lot of volatility. And so the messages, the key message that we have are all kind of based off the idea that, you know, you want to look through it, you want to manage it, and you want to take advantage of volatility in different ways. So one message would be like to phase into equities.
So as we see pullbacks in the market, I mean, we saw one, that's when we went attractive on equities a couple of weeks ago, you know, that was an opportunity. We think there'll probably be some more pullbacks in as well. And phasing into areas of the market that have had sort of, you know, sell-off opportunities.
So we do have lists and recommendations for specific opportunities in the US, Europe, and Asia of pullback. The tech sector, the Mag 7 is one that has been hit, you know, relatively hard this year. And so again, we like that theme.
So that's an area to kind of continue to engage. There's still a lot of uncertainty. So from a rates perspective and fixed income perspective, you know, we kind of say seek durable income, you know, meaning you don't need to take a lot of credit risk to get income right now, given that things kind of, you know, do get worse, those spreads will widen.
So stay kind of higher quality and don't take a lot of interest rate risk because the 10-year, like equities, we think it's on a range bound with 4.5%, you know, near the upper end. But it certainly could go higher versus going down to 4% if they realize kind of growth concerns. And a last message I'll highlight, sort of navigating political risks, you know, how do you do that?
Well, make sure you have diversified in your portfolio. And aside from the US dollar potentially weakening over time as the real sort of end of US exceptionalism, you know, one of the beneficiaries is gold. I think as, you know, central banks, as investors look to diversify, find what things they can hedge in their portfolio.
Gold is, you know, off a little bit from its highs, but I think there's a structural story there that remains relatively attractive. So those are some of the key messages in terms of how investors should try and navigate this still quite uncertain volatile environment, even if last week was a bit of a, you know, the clouds party, we got some sun in the spring. Well, Jason, thank you for keeping our listeners, our clients current on the thinking from CIO when it comes to the investment outlook and how to navigate these recently volatile markets.
Thank you for dropping by to begin another trading week and do look forward to picking back with our conversation next Monday. You're welcome. Have a great week.
You as well. Thank you, Jason. UBS Studios is part of the UBS Chief Investment Office within UBS Global Wealth Management.
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