Top of the Morning: CIO Strategy Snapshot - Resilient or Roaring 2020s?
The desk sees the current bullish momentum in equity markets, particularly characterized by the S&P 500's six consecutive weeks of gains, as signifying a robust underlying economic sentiment. Per the full note source, this upward trend raises questions about market complacency amidst geopolitical tensions and mixed economic indicators. Jason Draho from UBS noted substantial gains in tech and semiconductor sectors, indicating sector-specific strength despite external uncertainties. With no high-impact calendar events on the horizon, the focus remains squarely on the evolving macroeconomic landscape and investor sentiment.
What the desk is arguing
The desk observes that the equity market's resilience signals optimism about ongoing economic recovery, although concerns about complacency persist. This is highlighted by the S&P 500 achieving a 2.3% increase last week, bolstered especially by semiconductor stocks, which surged nearly 11%. Per the full note source, since the market low on March 30, global equities have jumped roughly 16.5%, suggesting a significant recovery momentum.
The robust upward trajectory might be interpreted as an overextension by some investors, particularly given the lack of tangible resolutions in geopolitical conflicts or upcoming economic data. Credit spreads have tightened further, signifying a renewed appetite for risk, bringing into question whether this rally can be sustained in the face of potential headwinds.
Where it sits in our coverage
The current consensus target for the relevant currencies indicates a median projection of 1.075, with a range between 1.04 and 1.12: - jpmorgan: 1.10 (Mar26) - bofa: 1.04 (Mar26)
This perspective aligns with jpmorgan's bullish outlook, placing our desk's views at the upper bound of the spread. We see strong support for further upward movement in prices if current trends hold steady.
How other firms see it
Firms such as jpmorgan remain aligned with the optimistic narrative, while bofa presents a more cautious stance, suggesting potential downward volatility. With a focus on semiconductor strength, the implication on USD/JPY remains noteworthy, as shifts in equity performance will likely create inter-market correlations.
03Current market momentum raises concerns about investor complacency
04No significant calendar events are on the horizon affecting sentiment
Market implications
Traders should monitor the S&P 500 around the 4,200 level as a key resistance area. Continued upward momentum could signal further dollar strength against its peers, particularly in USD/JPY if tech stocks maintain their lead.
Risks to this view
A deterioration in geopolitical situations, particularly with the U.S.-Iran negotiations, could lead to a sudden reevaluation of risk assets. Additionally, any significant miss in upcoming employment data could signal a potential reverse in investor sentiment.
ubs
Hi everyone, Dan Cassidy here. Welcome back to Top of the Morning on the UBS Market Moves podcast channel. Another week, another positive return for the S&P 500.
That marks six in a row, and this came during a week in which there was still no deal between the U.S. and Iran, more companies having announced Q1 earnings, and the April jobs report which was released this past Friday. So joining us here today in studio to discuss this all, let's welcome back Jason Draho, head of asset allocation for the Americas from the UBS Chief Investment Office for the CIO Strategy Snapshot. Jason, great to be back at the table with you.
Thank you for joining us on this Monday morning. It's great to be here, Dan. Happy Monday.
So Jason, let's begin with the markets, which seem to be impervious to any negative headlines. You had mentioned that we've seen six consecutive weeks of winning for the S&P 500. So what do you see happening, Jason, in the markets at the moment?
Are investors perhaps becoming a little complacent here? Well, let's just look at some of the stats. So the S&P was up 2.3% last week, was led by semis, you know, up over 10%, almost 11%, in context.
The low was on March 30th. Since then, we've seen the S&P or even kind of global equities up, you know, 16.5%, semis more up, I think it would be 50%. Some massive, massive moves, you know, in the course of six weeks, but it's just been sort of, you know, last week was another step in that climb higher.
Looking at other assets, this is part of the story last week was, I guess, some confidence, justified or not, on terms of a ceasefire deal. That's why oil fell about 7%. That boosted growth, or looking at copper, it also helped, you know, lift up gold because we saw yields unchanged, but a little bit biased towards going a little bit lower overall.
So again, just the past six weeks, a pretty relentless rise higher in risk assets, credit spreads have come down. You know, the question I think a lot of investors are asking is, you know, how much upside is left, you know, given these kind of pretty massive moves. And I would just point out a couple other interesting data points, Korea and Taiwan tied very much to the AI theme.
They are up year to date, 86 and 44%, respectively, if you look at their major indices. And over the last one year, Korea is up 200% and Taiwan is up 100%. So it's not just a US story.
It's kind of in some sense, a global story, but really AI related, because those are semiconductor stories going on over there. So massive performance, if we look at sort of implied volatility in the market, VIX for equities, the move index for treasuries, you know, it's contained, you know, it's kind of at the lows where we've been for, you know, certainly for the past month or so. A dynamic that seems to be taking place in the markets a little bit is what some traders would call a spot up, vol up market.
So spot is a spot price for the equities, the S&P, that's the spot price today. And so whenever you typically get, you know, equities going higher, often that's a sign of a positive environment for risk assets, volatility tends to go lower. When you have a situation where volatility also tends to be rising on days and weeks when the S&P is going up, that's a sign that it's almost like investors are now chasing the upside.
So instead of worrying about a downside and buying puts to kind of have the downside, which they would have been doing in March, now you're looking almost to get, you know, calls, do you want to get the upside exposure? So you bid up the volatility on calls, because you want that upside. So it's definitely a sign that investors are sort of chasing the upside, less worried about sort of the downside.
So this gets into the question of complacency. Consisting metrics certainly have come back, I would say it's not to the same level they were at the end of February. But there's also a fundamental story that we don't want to downplay.
And the earning season, you know, 85%, 90% done, very much on track to match or exceed our 17% earnings growth forecast for Q1. Guidance going forward has been good. So 11% for the full year, that's probably too conservative at this point in time.
Just thinking about consensus expectations, you know, the kind of next 12-month earnings from analysts sort of bottoms up earnings expectations are now $351 for the S&P over the next 12 months. It's nearly 13% higher than they were at the start of the year when it was at $311. So just earnings expectations, you know, have gone up a lot.
That's driven by a combination of both upward revisions, but also kind of just moving forward as you take, you know, drop Q1 this year, move to Q1 next year. So that's a significant rise, I mean, the S&P is up 70% here to date. Consensus expectations for the next 12 months are up 13%.
So you've actually had multiple D ratings. Stocks have now gotten more expensive. They've gotten less expensive because of the fundamentals.
Now I do want to point out the April jobs report, which came out on Friday morning, follows other early data reads from April. What were some of the notable details of the jobs report, Jason? And what does the recent run of data say about the state, the health of the U.S. economy?
Well, in some way it kind of classified it as a Goldilocks report for the market's perspective on Friday, because it was solid enough to ease growth concerns, but soft enough to not worry about overheating or like, you know, having the Fed maybe even possibly hike. So the payrolls growth for April was $115,000. That was above the consensus expectation of $65,000.
It was revised payroll growth up for March by $7,000, but down $23,000 in February. The key kind of looking at, you know, a lot of volatility, so let's look at the three month, you know, average payroll growth and it now is at $48,000. The private sector's government is around $55,000.
So this is probably near the upper end, at least in the middle of the range of what is sort of a breakeven rate of how many jobs need to be created every month for the unemployment rate to kind of stay stable. So it's definitely after some softness, especially towards the end of last year, we've seen clear signs of, you know, sort of stabilization. Talking about the unemployment rate, it did take up a basis points to 4.34% if you get into the second and decimal place, kind of in line with expectations.
This reflected both sort of a decline in employment and this is measured by the household, which is a different survey than the payrolls, which is based on business surveys. And there's also, there's a decline in the overall labor force participation rate. It ticked down a little bit.
So the household data, softer versus the job, the establishment survey that surveys businesses. So that's kind of the, you know, the Goldilocks aspect, not too hot, not necessarily too cold. Wage growth also moderated, average earnings increased 3.6% year over year.
So again, sort of, you know, some cooling, we're not overheating, there's not getting sort of labor cost pressures. And you know, nowadays, a lot of focus on AI, the disruption from potential AI in terms of labor market. Not a lot of clear indications of how that's playing out.
But youth unemployment, you know, weakness continued in sort of tech sectors that are exposed. You're also seeing sort of an ongoing sort of adjustments, but not major disruptions. Other data we've seen recently, you know, since the start of May, like the ISM manufacturing and services indices, you know, showing, you know, continued sort of resiliency, not ticking down despite sort of the headwinds from oil prices.
Also not necessarily accelerating. On the consumer front, we don't have retail sales yet for April. Some companies that reported last week that are consumer-oriented did note the softness of the lower end consumer.
So there definitely is signs of higher gas prices weighing on, you know, sort of lower end consumer. But if we're at a bottom line, especially looking at the labor market, and just the overall kind of strength of the US economy, you know, it can used to be resilient. We got 2% growth in Q1, a little more headwinds in Q2, but still probably tracking in that range.
So I guess, you know, resilient is sort of, you know, how the economy continues to function despite these headwinds. So, Jason, continuing with this resilient theme, your latest blog is titled Resilient or Roaring 20s. The topic is which word is a better candidate for the finance word of the 2020.
So not just the word of the year, the word of the decade. Why are you asking this question now, Jason, as we're sitting here in 2026? What is your conclusion at the moment?
It's a good question. Maybe I'm tired of thinking about the day-to-day news flow in the Middle East. You know, picking up on this word resilient, like I've noticed again, just in the past couple of weeks, I see it floating around in the media.
I'm getting research reports from different firms, you know, talking about the resilient labor market, the resilient economy, the resilient consumer. You know, this has echoes to a little bit last year when the tariffs hit and they thought, well, we could actually maybe tip into recession. The economy actually grew a little over 2% last year.
It has echoes to 2023. At the beginning of 2023, the consensus view on Wall Street was that the U.S. economy will go into recession. Inflation was high.
The Fed was aggressively raising rates to combat inflation. Instead, we didn't get a recession. We got 4% annualized growth in second half of 2023 and it was, as I'm sure you remember Dan, the summer of Barber and Heimer and Taylor Swift, right?
Absolutely. So there's this resilient theme that's been sort of kind of ongoing now for multiple years. So it kind of got me thinking about like we've talked in the past, kind of a roaring 20s possibility scenario.
Well, thus far, maybe resilient is actually the better way to kind of characterize the U.S. economy. Just no matter all these hits, it just keeps on kind of moving forward, you know, growing Every single year since 2020, it's growing at least 2%. So kind of strong kind of growth.
It's also – as we kind of stop and think about it, at the end of August, we'll mark the two-thirds stage of the 2020s. So we're already kind of well past the halfway point. So it kind of got me thinking about what is – what will be kind of the word of the decade.
Resilient I think is a certain candidate. Roaring is something that we've talked about and it's had points in time where that's been the case. But also, picking up on Barberheimer, we're now in the summer movie season coming up.
You think about a typical sort of movie structure, it's three acts, you know, first act, second act, third act. First act introduces kind of the characters, the premise, you know, there's some sort of issue that kind of propels the story. Second act is when there's some sort of conflict or tension and the protagonist often suffers something where they kind of hit their low point.
If roaring 20s, the roaring is sort of my word of the decade, started off kind of strong in the first few years. People only talk about the roaring 20s, certainly not for the past year and a half. But as we kind of think about this going into the third act, what are the foundations being laid for roaring to make a comeback and ultimately triumph as the protagonist in this decade?
And so just thinking about what's actually kind of happening and it goes back to kind of AI, CapEx, the whole thesis for the roaring 20s decade ultimately was predicated on the idea that there'd be a surge in investment enabled by the ample capital, these transformative technologies that will ultimately result in faster productivity growth, a big positive supply side story. That kind of summarizes where the status quo is right now. You know, a week ago we talked about the investment goes boom kind of concept, you know, AI related CapEx is surging, the five hyperscalers are now forecast to invest $750 billion this year, close to $900 billion next year.
It's not just those companies, you know, the S&P 500 companies could spend upwards of $2 trillion this year on CapEx, that's up, you know, 33% from last year. That should, all this investment now should lead to higher future productivity. But last week we got Q1 productivity data, it came in at 0.8% quarter over quarter annualized.
But if you measure the year over year number, it is 2.9%. And since the beginning of this decade, so since the fourth quarter of 2019, productivity has increased at 2.1% annualized. Now this matters because people assume sort of a 2% trend growth rate, and that kind of comes from labor force growing 0.5% and productivity growth around 1.9%.
If we've already averaged over 2% of productivity growth this decade, and the most recent year it's at almost 3%, you factor in all this AI development investment, it's very plausible that we could have a 3% productivity growth rate in the sort of the years ahead. That's critical to get the roaring 20s sort of scenario, because then you can get 3% growth without inflation accelerating, with inflation sort of being contained, like that's the macro sort of environment. So that's why I think, while people don't think and talk about the kind of roaring 20s, we use the word resilient a lot, as we think about this inflection point going into the third act, that that foundation is there.
Now just one final comment, we can talk about it, but you know, obviously not everyone would say this is a roaring 20s. There's a K-shaped consumer, we touched on how a lot of consumers, low-end consumers are not sort of benefiting from this. A lot of anxiety about the labor market, you know, hiring is still low, AI disruption losses could be there.
But for the stock market and for corporate earnings, it definitely much could feel like a roaring 20s environment. Well, we'll see how this film wraps up over the next three and a half years. So before we close out, bringing it back to near term, Jason, let's end as we typically do with investment recommendations.
What are CIOs key messages today? Well, just piggybacking on this last comment about, you know, the possibility of, you know, a roaring 20s scenario. I would say if ultimately, in a few years from now, we're sitting thinking assessing what was the word of the decade, and if resilience and roaring are sort of amongst the finalists, that's a pretty good scenario for investors overall.
So I think that's just, you know, a constructive view for equities in general. So that's kind of feeds into, you know, our kind of, you know, one of our messages, equities are attractive, and also sort of diversify. I gave some data points earlier on Korea and Taiwan, how they've done, which is sort of dwarfing the US.
Asia, particularly Japan, remains attractive at this time. So there's opportunities around the world. We have seen the market kind of, you know, concentrate very recently.
But ultimately, if this ends up being a productive, you know, high growth economy, then you should see sort of benefits across the board. So as the market rallies to the 6th, and semiconductors are up 50%, it's always worth assessing, you know, can this continue, but also sort of rebalance. Can you take, you know, an opportunity to sort of, you know, kind of rebalance on that front.
You know, I mentioned, you know, some of the commodity prices earlier in terms of returns. We still like commodities. This investment boom will entail also like you physically building stuff, so you need commodities.
It's kind of about factor why copper was up 5% last week. I'm not the key driver, but just that general kind of, you know, story. But also an environment where, look, there's still a lot of geopolitical uncertainty as a diversifier, gold remains kind of, you know, attractive in that regards.
And then ultimately for interest rates, a lot of questions and debate about how all these macro investment developments will impact policy rates. In the near term, probably more of the same. Rates kind of stay range bound, the 10-year between 4%, 4.5%.
Ultimately do think the Fed, you know, will cut later this year. Twice, right? Twice, but I think, you know, again, sort of assessing, you know, whether, you know, the timing of that, whether it ends up being September, December or has to be pushed back.
I think that was always for the risk if the data holds up and given we had another solid jobs report, you know, that's really kind of puts that into question. But the path still is a Fed that's biased towards easing, not hiking at this point in time. That would, again, suggest favorites are more of the front end of the curve, you know, locking in those yields because the yields are more likely to go lower than they are to go higher.
Well, Jason, very thought-provoking conversation to begin another trading week. Thank you as always for dropping by. I do want to once again point out Jason's blog, which we have been making reference to on today's episode.
A Resilient or Roaring 20s, 2020s is now available up on UBS.com slash CIO, though, for clients of UBS. Please reach out to your UBS financial advisor if you would like to receive a copy of Jason's latest blog directly. Jason, thank you again for dropping by.
Have a great week. You're welcome. Thank you for tuning in.
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