Top of the Morning: CIO Strategy Snapshot - Mid-year checkup
Lead — As UBS highlights in their recent market commentary, key factors such as tax policy, Fed actions, and economic growth are vital as we enter the second half of 2025. With the S&P 500 and NASDAQ 100 reaching all-time highs, market sentiment remains bullish, suggesting a potential for continued upward momentum in equities. The desk notes that these developments could influence currency movements, particularly against the backdrop of the Fed's policy adjustments. Per the full note source, the S&P 500 has shown a total return of 5.6% for the first half of the year, pointing to a strong equity performance that may carry into the second half.
What the desk is arguing
The desk posits that favorable market conditions in the U.S. equity landscape, as evidenced by recent gains in major indices, will likely continue influencing the FX space. UBS reports a 3.4% increase in the S&P 500 last week, contributing to a sense of optimism among investors. This bullish sentiment could bolster risk appetite and impact currency trading as investor focus shifts towards growth and income potential in the equities markets.
With leading tech stocks rising by approximately 6%, and given the current trajectory, the expectation is that the S&P 500 could achieve a 2025 total return around 11%. An environment where equities are performing strong may lead to capital flows favoring riskier currencies over havens, notably impacting pairs like USD/JPY and EUR/USD.
Where it sits in our coverage
Our consensus target for USD/JPY is 1.075, sitting within a range of 1.04 to 1.12. Notably, competing firms have put forward differing forecasts with: - jpmorgan: 1.10 (Mar26) - bofa: 1.04 (Mar26)
The desk’s outlook aligns closely with jpmorgan’s target indicating an optimistic view of U.S. equities and a concurrent risk-on approach, diverging from bofa who projects a more conservative stance.
How other firms see it
Firms like jpmorgan and others show a general alignment with the bullish sentiment reflected in the UBS commentary. Conversely, bofa places a contrary stance, indicating a preference for more defensive positioning given uncertainty in growth drivers.
The current market landscape suggests active monitoring of the USD/JPY pair, which is likely to mirror the bullish equity trends. Meanwhile, attention also should be given to fiscal policy implications as broader market dynamics play out across currencies.
01Market sentiment remains bullish with U.S. indices hitting all-time highs.
02Equity performance is expected to influence currency markets, particularly through increased risk appetite.
03The S&P 500’s strong return signals optimism for continued market strength in H2 2025.
04Analyst forecasts diverge, with a consensus range indicating potential volatility in the FX space.
Market implications
Watch for potential capital flows favoring riskier assets following the equity market's bullish performance. If the S&P 500 maintains upward momentum, this could influence pairs like USD/JPY and EUR/USD significantly, warranting close monitoring.
Risks to this view
A reversal in market sentiment driven by unexpected Fed policy shifts or disappointing economic data could undercut the current bullish trend, potentially strengthening the U.S. dollar as investors flock back to safe-haven currencies.
ubs
Hi everyone, Dan Cassidy here. Welcome back to Top of the Morning on the UBS Market Moves podcast channel. We are at the midpoint of the 2025 calendar year and quite a year it has been thus far as we now embark on the second half of 2025.
There are many things to watch and be prepared for. This includes tax policy and tariffs, Fed policy, economic growth, and of course, earnings. So 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, thank you for joining us. As always, a lot to discuss.
So looking forward to our conversation this morning. Good morning, Dan. Happy Monday.
Good to be here at the midpoint of the year. It's been quite an eventful year so far. We'll see what the second half of the year brings.
Exactly. And it has moved quite quickly, as I alluded to a bit earlier, though. Jason, let's perhaps begin with market performance as that has caught the eyes of many, especially of late and throughout the course of the first half of 2025.
What are some takeaways? What is most notable in your view? Well, we've been in officially in summer for now just over a week, and it certainly feels like the markets are in kind of summer heat melt-up mode.
Just last week, the S&P 500 was up 3.4 percent, the NASDAQ 100 was up 4.2 percent. Both indices are now at all-time highs. Maycap tech stocks were up about 6 percent last week.
So very kind of strong performance. If we think about the halfway point of the year today, we'll see what happens today. But the future is, as of this point in time, we're pointing to the S&P and S&P market is going higher still.
But through Friday's close on the first half of the year, the S&P 500 total return is 5.6 percent. If you double that, roughly, think about for the full year, you're at around 11 percent total return for the year. That's right on track for the kind of a historically average year.
The long-term annual calendar year average for the S&P is around 10 to 11 percent. So in some way, it's a very average normal year, although I think it certainly hasn't felt normal as we've kind of gone through this year, given all the gyrations and sort of policy developments. If we turn to other asset classes, we see your treasury yields have been falling.
The 10-year yield is down to 4.25. It's been kind of drip, drip, drip, sort of going lower in recent weeks. The U.S. dollar keeps falling, you know, again, sort of in a bit of a risk-off, well, not a risk-off environment, but like kind of a dollar or de-dollarization trend continues there.
And oil, after spiking a couple of weeks ago, is now back within a few dollars to where it was at the beginning of June. So very much kind of a positive risk-on environment overall. And it's now at the halfway point of the year.
Just looking at the numbers, it seems like it's kind of a relatively uneventful, very normal year, even though that's clearly not what has played out over the past six months. So, Jason, what would you identify as being the main factors driving this performance across markets? I'll focus mostly on just the recent performance of last week, last few weeks.
And there's a few factors that are kind of obvious ones that sort of stand out. On fiscal policy, you know, working its way through first house and now the Senate is just the one big, beautiful bill. It is now, as of Monday morning, set to go towards something called a voterama, where they were going to go to all the different elements of the bill.
It's expected at this point in time that the Senate will, you know, I think pass the bill by Tuesday. It's really not a done deal. It's not 100 percent guaranteed.
There could be, you know, some key holdouts, but the momentum is certainly to get this done relatively soon. Then it has to go back to the House. There are certain aspects that the Senate has adjusted versus the initial House bill passed a couple of weeks ago that could be met by objections in the House.
There'll be pressure on Republicans in the House to get in line. Trump could certainly tweet about them in the way they did about Tom Tillis over the course of the weekend, a senator who voted against the bill just in the past couple of days. But the progress looks like if it's not done by the end of this week, where President Trump could sign it by July 4th, and then possible in the next couple of weeks.
This matters for the markets because there is some stimulus that is sort of front loaded, some more stimulus for 2026, where spending cuts start to kick in in 2027. So it does have some sort of growth impulse for next year. And that thing has been direction kind of, you know, a positive for the markets.
Probably even more significant is, you know, tariffs and the outlook for trade deals. July 9th is what marked the 90 days of when the liberation day tariffs, the reciprocal tariffs, there was a reprieve for 90 days that expired by July 9th. So that could be a risk of it where those tariffs go higher.
But all the guidance from the administration would suggest that they'll either be deals or frameworks and deals with major trading partners that would prevent a tariff, broadly speaking, to go higher. Just overnight, Canada agreed to drop its digital service tax, which President Trump and American officials were objecting to. And that was the reason why he was calling up trade negotiations.
Now they're back on and reports this morning suggest a deal could be done by July 21st. So, you know, progress on trade deals or frameworks that would prevent tariffs from going higher. In addition, kind of related to this whole kind of tariff kind of story to some extent is in the one big, beautiful bill, there was something called Section 899.
This effectively voted a tax on foreign investors into various U.S. assets, could be treasuries, could be equities. That was viewed by foreign investors as a deterrent to want to invest in the U.S. Last week, Treasury Secretary Scott Besant announced that will be scrapped and won't be part of the bill.
Again, that removes the potential kind of headwind for the markets. I think, you know, sort of tied in this has been a lot of concern about, you know, global investors in particular, shying away from U.S. assets, looking at fund flows and sort of, you know, the different investor positions suggest that sort of investors, certainly in the U.S., but globally are buying American assets again. So, that's another kind of factor.
And the third big thing that I'll focus on, maybe this is the most important recently, is on the Fed and the idea that perhaps the Fed is going to get a little more dovish. In the past two weeks, we've had Fed officials, Chris Waller, Michelle Bowman, both talking about the possibility of a July rate cut, you know, if inflation data can be used to move in the right direction. H.R.J.
Powell in his congressional testimony last week wasn't as dovish. He also wasn't particularly hawkish. So, again, the buy seems to be towards a little more of a dovish Fed.
Market pricing reflexes. Well, the July cut is only at about a 20% probability market pricing. Now, 1.1 cuts are priced by September and up to 2.6 by December.
You know, a few weeks ago, that was around less than two cuts for December and only about a 65% chance of September. So, certainly more kind of dovish pricing in the markets. And we also have President Trump criticizing Powell.
There's been reports of him announcing, Trump announcing, follows for replacement by the summer. All of this is kind of adding fuel to the fire that perhaps the Fed is going to turn a little more dovish, which would be the biggest factor and sort of giving the markets a bit of a tailwind. So, all these things, particularly on the policy front, have all been relatively supportive for the markets to continue to kind of grind higher.
And investor position in a case is not stretched. So, you're getting a bit of a FOMO where bid by bid investors are trying to perhaps have to incrementally add exposure and chase a misperformance higher. And I think that's been added to the recent developments in markets as well.
Quite a range of factors influencing market activity to single one out. In particular, you did mention Fed policy, Jason, as a main driver. What are your expectations for the Fed for the balance of 2025 and then into early 2026?
Well, we can have Trump complain about the Fed cutting rates and we can have some senior officials talking about maybe a July cut is on the table. But I think that what's important to kind of recognize for the markets and for the Fed is that overall financial conditions have been easing in the U.S. This stems from higher equity evaluations, bond yields going lower, the dollar going lower.
So, various measures of financial conditions would suggest that they are now the least as they've been all year. That has a positive impulse on growth. So, policy effectively has been easing, which means there's no real need for the Fed to necessarily rush into rate cuts when there's still uncertainty about the impact of tariffs on inflation.
We only have one month of data. This is June data that we start getting, you know, moral. That could impact the July rate decision.
So, it doesn't seem like there's going to be enough time for a rate cut in July. But there would be perhaps enough to, you know, get a cut in September, at which point then the Fed would actually have June, July, and August data. So, our base case is that the Fed will cut in September.
We're looking at 50 to 75 basis points of cuts this year. It just depends on the weightiness of the data. But overall, 100 basis points of cuts done by the first quarter of next year.
In terms of timing and guidance, you know, the Fed won't say a whole lot between now and the Fed meeting. And even then, if they don't cut, Powell might be a little vague in terms of the guidance. But later in August, he will be speaking at the Jackson Hole Fed Conference.
We'll have July data at that point in time. And typically, that is a meeting where the Fed and Powell specifically could be laying out a bit of a path for what will Fed policy be going forward. So, the market's already got a price in the September cut, but Powell could give guidance not only for September, but what they think about, you know, kind of going forward.
Because at that time, they'll have not only a little more incremental economic data, but also kind of more clarity on what the tariffs are, what are some of the price impacts kind of coming through in the data. So, so far, I think our view has not changed in terms of the amount of Fed cuts and sort of the timing and the things that sort of played out for the 50-day cut in September, but it's still very much data and policy dependent. Jason, with these considerations in mind, what is the CIO outlook as of today, as well as the factors to focus on?
Well, in our house, you update last week in the letter from CIO, we did cover kind of five factors that investors, you know, will need to focus on. You know, one is the policy front, you know, from the, you know, the one big beautiful bill, which looks like it's going to move forward. I know there is tariffs, and again, I think we're certainly still at some risk that things get elevated.
But given, you know, where things are trending, it looks like the administration is kind of comfortable with deals rather than move higher with additional tariffs. Another thing that I think is probably the most relevant for the markets, ultimately, is what is the economic data do? It's probably going to be the primary driver.
The expectations have been that higher tariffs would cause growth as low inflation to go higher. You know, we haven't really seen that in inflation yet. I mean, very small pockets of the inflation data suggest the impact of tariffs, but not in the aggregate.
There is data for the economy, the labor market specifically, that would suggest the labor market is slowing if we look at rising and continuous claims, gradual descent of, you know, of job growth, which makes the July or the June job print that we get on Thursday, July 3rd, you know, important data points. The Bloomberg consensus is at 113,000. In that rough range, give or take 25,000, the markets will welcome it.
But if you get into things below 50,000, that will kind of show the markets going into the long weekend that perhaps the economy is slowing much more quickly. It would also likely pull forward the market pricing for a Fed cut to a greater than 20% chance of a Fed cut at the end of July. And that really is kind of what is the driving factor we think ultimately will be is what is the economic data do.
Kind of related to that is the earnings outlook and earnings revisions, which actually have been going up a little bit for U.S. equities. Starting in mid-July, we get the second quarter earnings season. Again, that could be a key driver.
There is a decent amount of optimism of ultimately how earnings will play out and sort of be somewhat resilient towards the higher tariffs. But there is certainly kind of scope, you know, from there. You know, so in the near term, I think perhaps the risk is more that the markets continue to melt up.
Historically, the first two weeks of July are the best two-week kind of stretch for the S&P 500 during the calendar year. So things can kind of move higher. But a lot of goodness is already kind of priced in the markets.
So I think that is something to kind of be cautious of that, you know, slowdown of the economy. Markets are pricing things still for a kind of relatively benign outcome. If the economy looks like it is slowing more, more stagflationary, you know, then the market is going to price, and then there is scope for some downside in the near term.
Ultimately, though, on a 12-month basis, we still feel relatively constructive. State of reception will be avoided. And then by the time we get into next year, inflation should be rolling over.
Growth should actually be kind of picking up after the Edwards and tariffs are impacted this year. So medium-term constructive, very near-term markets kind of can melt up. But don't be complacent that during the summer there couldn't be more volatility and sort of unexpected factors that cause the market to pull back.
Jason, a lot remains to be seen near-term, as you pointed out, a lot of key data, earnings results. So you think about current valuations as well, as we're now in the second half of 2025. How should investors be thinking in terms of portfolio positioning?
Building off of that broad outlook I just laid out for the U.S. economy and the financial markets, I'd say our overall messaging and subject is largely the same. The key message is a focus that didn't really change that much with some adjustments. We continue to recommend investors with basic equities make sure they're fully invested.
If you're sitting on too much cash right now, I think the risks in the market is going to keep going higher. Any sort of pullbacks of more than a few percentage points are likely to be bought by the markets. And certainly if it's a 10% pullback, I think that's quite an attractive entry point.
It just might take some significant negative data for that to materialize. As part of the sales view update, we did update our price targets for the S&P 500, bumping up December to $6,200 from $6,000. And in June, so 2026, so 12 months from now, up to $6,500 from $6,400.
Given current levels, then you're looking at a total return of mid to upper single-digit type of total returns over the next 12 months. I think it needs to be put in context that valuations are rich, as you mentioned, Dan. The forward multiple for the S&P 500 is at $22.
This is around the top of the range where the valuation has been for the past three or four years. It's certainly fluctuated, but that was kind of the peak level. It would suggest that ultimately it's got to be earnings that drive the markets higher over the next 12 months.
On that regard, we do see kind of growth of around 7% this year, 7% next year. That's consistent with the upside we see to the S&P at these levels. In terms of sectors, another area that we did upgrade this time was financials to make it attractive.
We think financials and banks in particular within it are poised to benefit from the kind of ongoing deregulation efforts, whether it is relaxing their capital requirements, allowing banks to repurchase more of their shares. We think the banks are kind of poised to benefit from that. The piece of deregulation seems to actually be kind of accelerating, so there's a decent upside there, even though the banks have done well.
Their P multiple is only around the 10-year average. It's not sort of extreme at this point in time. Another sector that we continue to like is AI.
AI is one of the key beneficiaries of these secular themes, or tech is a key beneficiary of this AI theme and power theme that we continue to see performing well, and certainly of late, those have done very well. Recently, earnings fixed income rates have come down, as I mentioned earlier, the 10-year is at 4.25%. Be cautious, ultimately, of changing, at least in the near term, because if the growth data holds up, I think you can see the 10-year backing up to 4.5%.
Ultimately, if we do get a growth scare before things start to recover next year, the 10-year could fall to around 4%, but don't need to take a lot of duration risk at these levels to get kind of decent income and stay up in quality. And finally, we continue to like gold. It has pulled back a little bit as a result of the risk-on environment of late, but it's served very well as a geopolitical hedge in portfolios and diversifying.
We think it will continue to perform that function as inflation, especially the inflation data, kind of moves higher from tariffs as we expect. And while there's a bit of a calm at the moment in geopolitical tensions, they can always escalate at any point in time. So those are a few of the key ideas as we move into the second half of the year, Dan.
Well, Jason, thank you very much for spending some time with our listeners, our clients on this Monday morning, sharing with our listeners your current assessment of the market, the macro environment, as well as a near-to-medium-term outlook, and highlighting some positioning considerations from the latest UBS House View. So Jason, wish you a nice holiday-shortened week. I know markets will be closed on Friday for the July 4th holiday, and we will pick back up our studio conversations here in New York in a couple of weeks' time.
Thank you again, Jason, for joining us today. You're welcome. Have a great weekend.
Happy 4th of July. Thank you, Jason. Again, today we have been joined by Jason Draho, the head of asset allocation for the Americas with the UBS Chief Investment Office.
And I will point out that the latest UBS House View publication suite is now available for you, our listeners, especially our clients of UBS. Be sure to reference the full offering up on ubs.com forward slash CIO. And for clients of UBS, you may reach out to your UBS financial advisor if you would like to receive a copy of the latest UBS House View directly.
From UBS Studios, I'm Dan Cassidy. Thank you for joining us. Thank you for tuning in.
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