Top of the Morning: CIO Strategy Snapshot - What if?
The desk asserts a bullish outlook for U.S. equities driven by optimism surrounding trade deals and solid economic data, as highlighted in the UBS strategy snapshot podcast source. Jason Draho notes that the combination of a positive jobs report and signals from the Trump administration regarding tariffs have created a favorable environment for market growth. With continued support from Q1 corporate earnings also adding to the positive sentiment, this momentum may not wane immediately. However, traders should remain vigilant, as external factors can quickly alter this trajectory.
What the desk is arguing
The desk views the current market momentum as underpinned by a blend of improved corporate earnings and a stronger economic backdrop, particularly in the United States. As noted in Jason Draho's commentary, optimism about potential trade agreements is providing significant impetus for equity markets to rally. Per the full note, the effective tariff rate's potential decline is a key driver that could sustain this positive momentum.
Supporting this view, recent job data indicates economic resilience, with April's jobs report exceeding expectations. This has mitigated fears of an impending recession and has positively influenced market sentiment, reinforcing the desk's bullish stance.
Where it sits in our coverage
Our consensus target for U.S. equities stands at 1.075, with a range of 1.04 to 1.12. Key firm targets include: - jpmorgan: 1.10 (Mar26) - bofa: 1.04 (Mar26)
This optimistic outlook is in alignment with jpmorgan, which shares a central thesis of sustained growth, while contrasting with bofa, which expresses caution and a more bearish target.
How other firms see it
jpmorgan and other firms exhibit a similar bullish sentiment, focusing on continued economic growth and corporate earnings as central themes. Conversely, bofa aligns itself with a more cautious view, potentially influenced by concerns over trade tariff impacts.
Traders should watch the impact on the S&P 500, as the trajectory aligns with broader U.S. economic indicators, including labor data and trade negotiations, influencing market performance significantly.
01Recent U.S. economic data and trade deal optimism are driving equity gains.
02April's positive jobs report has helped alleviate recession fears.
03Market momentum may continue but is susceptible to quick shifts based on external factors.
04Key targets among firms show divergence in equity outlook, with **jpmorgan** bullish and **bofa** cautious.
Market implications
Traders should monitor the S&P 500 for signs of ongoing support around the 1.075 level. The interplay between trade negotiations and economic indicators will be crucial as developments unfold in the coming weeks.
Risks to this view
Should trade negotiations stall or negative economic data emerge, particularly relating to the jobs market or corporate earnings, the bullish outlook could be jeopardized, prompting a swift reversal in market sentiment.
ubs
Hi everyone, Dan Cassidy here. Welcome back to Top of the Morning on the UBS Market Moves podcast channel. U.S. equities had another positive week.
The S&P 500 was up all five sessions last week. Good earnings, positive economic data, and further optimism about the potential for trade deals provided the market with tailwinds. The question is whether this can continue or will headwinds resume.
So joining us to discuss this all today, glad to welcome back Jason Draho, Head of Asset Allocation for the Americas with the UBS Chief Investment Office, dialing in from overseas for this Monday morning. Jason, thank you for spending some time with our listeners and clients to begin another trading week. It's nice to have you back.
Good morning, Dan, and good afternoon from Zurich. Good to be here from other parts of the world today. So there's a lot to talk about, Jason.
I mentioned that the S&P 500 has been up now for nine straight days. Let's begin with recent market momentum. What do you think is driving the markets higher?
Well, you kind of gave a bit of a tease to what my answer would be with your opening comments. I'd point to a few factors that are really lifting the markets higher. One is kind of incremental optimism on trade deals being completed, or at least the frameworks of deals and sort of the understandings of what that entails.
Actual formal deals may take many months, but certainly signals from the Trump administration to continue to kind of point in that direction, point in the direction of the willingness to take actions that will ultimately kind of bring down the effective tariff rate, and that's what is kind of critical to the markets. So that optimism and moving in that direction certainly has provided the markets with a little bit of a tailwind. On the economic front, the data has continued to be relatively solid.
We got a good jobs report for April on Friday, so I think there's concerns about a slowdown and potential recession. Well, that risk certainly still exists. The data thus far and bottom line suggests still some sort of resiliency.
The earnings for S&P 500 companies, and we got a number of companies report last week now almost 40% of the market cap, and the overall story for earnings has been, I'd describe it as solid. Certainly not a lot of signs of disappointment related that would be led to tariffs in some way. So lack of negative news in some ways is a positive on the earnings front, the same would apply to the economy, and then there is certainly a technical factor that's driving the market higher.
We're seeing a situation where certain investors, for example, hedge funds that had de-risked and also had short positions on, one of the first things they're doing is closing their short positions. So there's a certain kind of short cover in the markets as downside tail risks start to get mitigated by different policy actions from the Trump administration. So that's certainly helping.
Then various sort of strategies that are more systematic-based that are de-risked, and so right now they're being forced to chase the market higher. One example is vol targeting strategies that as volatility rises, they have to reduce leverage, have to reduce their risk to exposure. Volatility surged into early April, and now only for the past 10 days.
If you look at the 10-day volatility, realized volatility for the S&P 500 is actually lower than it was at the end of March, so it's kind of fully retraced its rise. As that happens, then these strategies will systematically kind of lever up at exposure, so there's a technical bid also helping the markets. So the combination of economic and earnings fundamentals being okay, fine, you're not spectacular, but certainly not bad.
More commentary from the policy front from President Trump and other people in the administration that suggest progress is being made towards some sort of trade deals, and then these technical factors, all that's contributed to the pretty remarkable bounce back in the S&P 500 over the past few weeks. So with that, Jason, let's focus in now on the state of the U.S. economy. We're coming off a week where we saw some notable releases accounting for Q1 GDP.
We had the latest jobs report released this past Friday. What does the latest data say about the state of the economy with some tariffs now in place? Well, let's start just with actual kind of growth rates.
We did get Q1 GDP data last week. It came in at minus 1.04%, so a negative number, but a lot of that was due to essentially front-running tariffs as a lot of imports came into the country. The way GDP accounting works is that if you're importing more but exporting the same amount, then your net exports get even more negative.
That is mechanically a drag on overall GDP growth. If you look at private sector, you know, fall in demand or real consumption growth, those numbers are relatively strong in Q1, you know, growing between 1.5% and 2%, definitely some moderation from last year and from the fourth quarter, but if we think that's a cleaner measure of the state of the U.S. economy, that indicates that the consumer overall is holding up reasonably well. We also then got, you know, the April payrolls report.
The headline number was better than expected by about 38,000 coming in at 177,000. The prior two months had been revised lower by almost equal amounts on net, you could say, you know, kind of in line with expectations, but still in real time where you might start to think you'd see some weakness in the labor market stemming from tariffs, and for April, that wasn't necessarily evident in the data. And the unemployment rate, you know, to help study around 4.2%, so the overall picture from the labor market still, you know, suggests it remains relatively, you know, solid.
Hiring is moderating, but also firing remains, and layoffs remain, you know, quite contained. So it's a little bit of a holding pattern for the labor market overall. The other data, like the ISM Manufacturing Index, you know, it was in contractionary territory, but it was better than expected.
In general, sort of hard data, you know, things like payrolls, retail sales, durable goods orders, you know, that data has been generally kind of surprising to the upside for the past, you know, month or so, so that's the good news, sentiment continues to get worse. But we've seen this sort of gap between hard and soft data in the past. Now, a lot of the data could be dismissed as somewhat backward looking, and it reflects where the economy has been, especially Q1 GDP, it doesn't reflect yet the actual impact of much higher tariffs than the economy has experienced in many years.
And so, therefore, investors might be tempted to sort of discount that, but I think it is important as context to know that as the need of the tariffs start to take in, they potentially go higher. So the economy entered in this period of uncertainty in relatively, you know, good hands and good strength in terms of, you know, demand by the private sector, you know, kind of job growth is relatively solid, real incomes are generally kind of rising. So it does provide ballast and sort of a buffer for the economy overall.
So, you know, the takeaway is that you have an economy that, you know, we classify as resilient, but it's certainly going to potentially kind of slow down, you know, based on the consequences of the tariffs. But so far, it's been, you know, a relatively decent story for the U.S. economy this year, despite all these tariff concerns. So Jason, I do want to tie into our conversation your latest blog, the title is, What If?
And you do suggest that it would be a mistake to dismiss the upside case of U.S. growth even in the face of higher tariffs. Why do you think that's the case? Well, we think about the kind of U.S. exceptionalism story.
It's something we talked about on the podcast last week, where I suggested that by one dimension of U.S. exceptionalism, that's likely to sort of, you know, fade this year. And that was the level of actual GDP growth that we saw the last two years at nearly three percent versus, you know, take a region like the Eurozone, that was at 0.6 percent. Really large discrepancy.
This year, that gap is likely to be much narrower, with, you know, we are expecting around one half percent growth in the U.S., around 75 basis points in the Eurozone. So kind of narrowing that gap. And directionally, it's true that that gap is going to narrow, but the kind of consensus view that most economists have, that most investors would have, is that the U.S. economy is going to slow because the tariff inflation is going to go higher so that you could either have a recession or at least a stagflationary, you know, outcome.
But what I ask in the blog is like, well, what if we're kind of wrong about this? What if it turns out the economy, you know, has its impact, but it's relatively modest that, you know, it doesn't really kind of go down the path of being somewhat stagflationary? You know, are we overestimating the likelihood of these other things and underestimating the possibility that things could actually be, you know, okay on an upside scenario?
And I think it's kind of worth asking that because I'm certainly experiencing some kind of deja vu from two years ago, three years ago, where the consensus view, you know, pretty broad consensus was that the U.S. economy is going to go into a recession. Inflation's high, the Fed has to raise rates aggressively, they will, that's going to cause a recession. And even after Silicon Valley Bank went under, there was concerns about, you know, credit growth would be materially slow, that's going to be another drag on the economy.
And that kind of recession certainly seemed quite likely. Not only did a recession not happen in 2023, 2024, but growth, you know, kind of far exceeded expectations. So I think we have to have some humility as investors, as those who kind of forecast the economy about our ability to predict how things exactly will play out with the U.S. economy.
And just given the experience from the past couple of years, you know, one could kind of point out that what happened during that two or three-year time period of why there was no recession, there are certain attributes of the U.S. economy, some of which may persist, some may not, which is kind of why there's this kind of upside scenario. And we know that one of the reasons why the economy did not experience recession is that household finances, the balance sheet of the private sector was in pristine shape. We list on the balance sheets a lot of excess savings, a lot of ability to continue spending, despite rates going higher.
Household balance sheets are in good shape, but they're not quite in pristine shape the way they were before. And it certainly lost cushion to deal with higher prices of goods, you know, higher inflation and potential kind of slowdown in the economy, but, you know, not terrible. The Federal Reserve had policy that was, we think would be restrictive, and that should slow the economy.
But within concept, we'd suggest that the policy wasn't that restrictive, that sort of the Fed neutral rate had probably drifted higher and therefore would seem like a high policy rate that was restrictive at almost five and a half percent. Turns out, perhaps that wasn't. Now, the Fed has been easing, and perhaps that has made policy less restrictive.
The Fed's likely to be behind the curve, meaning they'll be reactive to weakness in the economy, not proactively cutting before the weakness materializes. That is certainly one change. Another change between now and a few years ago was that there's a massive positive labor supply story due to immigration that allowed the economy to grow faster without being inflationary.
And that sort of labor supply story has certainly changed, and in fact, it may be working the other way if deportations, if immigrants were to pick up. So those things have kind of changed that were maybe, or not as favorable, and one of the reasons why there was no recession. But the thing that I really would want to focus on why there could be sort of an upside scenario or less damage to the economy from tariffs and people call it a dynamism X factor.
And the way I think of it is that the economy's ability to adjust in fairly close to real time between imbalances, between supply and demand, that's underappreciated. Prices can adjust it very quickly. It's what I kind of call the uberfication of the economy.
You think of like uber, like, you know, surge pricing, when there's a big demand on a Saturday night, you know, the prices rise, it cools demand, it also induces more potential drivers to go in and offer their services, supply increases. You know, large parts of the economy, the ability for prices to adjust fairly quickly, it can happen in a way that did not exist 30, 40 years ago. So the ability to rebalance very quickly, supply and demand, means the economy can kind of get back into balance, kind of grow steadily, while inflation doesn't get out of hand.
Now that's hard to quantify, like what exactly the effect is, but I think it's certainly something that is, you know, that we have to kind of keep in mind, and there is, I call this more of the upside risk that perhaps the economy, you know, won't be as damaged as much by tariffs as investors and economists, you know, fear at this point in time. There's likely to be some interest growth, and it's likely to be a hit to inflation going higher, but some of these scenarios that investors are worried about, perhaps that's a little bit overdone. So that is something that's important to think about, and while it's hard to describe exactly what the markets are pricing, the fact that they've, you know, risen nine, three days is implicitly sort of perhaps a recognition that the economy could actually be okay and better than people were fearing just, you know, a few weeks ago.
So that whole dynamic is, you know, it's kind of what I, you know, something to kind of keep in mind as we kind of observe the markets, think about where they're headed, that there is an upside scenario. It's not just, you know, kind of all downside based off of the negative implications of tariffs on the U.S. economy. Jason, as it relates to the economy, we have to account for corporate earnings.
We're continuing to make our way through the Q1 earnings season, coming off of a big week of reporting last week. From your vantage point, what are some notable takeaways from the Q1 earnings so far? Well, we've had about 75% of the S&P 500 market cap report, you know, 40% of that was last week.
And what it looks like so far, and it's probably likely to be close to the final numbers, is that corporate profits for the S&P 500 are likely to grow about 9% in the quarter. I know that's much better than what our, you know, our team was expecting, which was initially was almost 5%. Nearly about 60% of the companies are beating on sales estimates, while 70% are beating on earnings estimates.
And both of those are just slightly softer than historical average. So I would find a knockout fantastic quarter. But again, given the concerns about tariffs, we're not seeing a lot of evidence yet of tariffs really having a negative impact on earnings overall.
On a more forward-looking basis, of course, you would expect that tariffs will happen. But there's only been a handful of companies that have actually stopped giving guidance at all. And those that continue to provide guidance, it has still been reasonably good.
We do see analysts revising their earnings estimates lower. But this kind of what's happening thus far for the S&P 500 overall, you know, that kind of downgrade for the S&P 500 earnings is pretty consistent with normal patterns. It's not sort of out of the ordinary.
So again, if you just look at the data that we have thus far, it doesn't, you know, signal any indication that there's a dramatic development going on with tariffs that could negatively impact earnings. The other sort of, you know, real major takeaway from the earnings season is what's happened with kind of the AI theme. What we've heard and seen thus far is that all the AI kind of fundamentals remain in track.
We've seen this from companies like, you know, Facebook or Ometa specifically. You know, they are increasing their capital expenditure guidance and they're talking about, you know, the management team is talking about, in many ways, they're using AI to improve the efficiency and enhance their offerings. Microsoft, you know, kind of quelled some concerns about their expenditure plans for this year and next year.
But their cloud business is doing, you know, very well, it exceeds expectations by quite a bit. So overall, the story for AI and sort of their focus on the MAG-7 is a positive result. It is a thesis that has been kind of pushed to the back burner while investors have been focused on tariffs.
And even if we go back earlier in the year, you know, the news about DeepSeek, you know, the Chinese AI company that kind of called into question the uniqueness and the return potential from U.S. AI models and all this AI capex spending, you know, what these companies reported suggested, like, you know, that those concerns have been a little bit overdone. These are still strong, quality companies that have been able to continue to push forward on the AI team.
So no real change there. The only other thing I would sort of mention is that for the consumer overall, I think the picture is a little bit more mixed. Your MasterCard and Visa, you know, have a pretty broad view of the overall consumer landscape and they're saying that spending is, you know, kind of, you know, is resilient.
But we don't get consumer company support until later in May, and that will give a cleaner read on how consumer spending is holding up overall. And similarly, we'll get other data, more broad data in terms of retail sales, you know, for April, later in May, to give an indication of where the consumer is. But for the bottom line, to take away from 1Q earnings season thus far, it's, you know, better than investors feared, suggesting, you know, so far that companies continue to show, you know, relatively healthy, you know, profit growth.
And the trends going forward are kind of consistent with typical kind of patterns throughout the earnings season. Nothing that would suggest a dramatic drop-off is about to happen because of the tariffs. In terms of what investors should be doing at the moment, Jason, let's end with asset allocation.
What are your current recommendations from the Chief Investment Office? Well, we've had a very good run for two weeks for U.S. equities, you know, but, you know, it's not going to move up in a straight line. And already given the rise when we look at valuations, even with a solid earnings season, you know, U.S. stocks are still relatively expensive.
And there's a lot of, I would say, good news, but certainly not a lot of negative news has been priced in after the past couple of weeks where, you know, tariff concerns, trade deals have been sort of talked about, and the economic data has been, you know, okay thus far. We haven't seen yet a lot of economic, you know, pain should have shown up because of tariffs. Yet, it'd be wrong to assume that there won't be something that materializes.
You know, that still would be my base case and our base case that, you know, U.S. economy will flow. And as a result, U.S. earnings will be impacted. It's just not yet reflected in the data, but it is coming.
So, given the move higher in equities, it does feel like it's probably at the top end of a bit of a range that we might be in for, you know, for the time being. So, some choppiness near-term, that was likely to continue. But given the fundamental story, it still seems to be relatively constructive.
You know, the way we think of it is that, you know, pullbacks in the markets are opportunities to kind of phase and add exposure. Our year-end price target for the S&P is 5800, so limited upside from here. And if we look to 2026, you know, the earnings growth the team expect is up 10% over a flat 2025.
At some point, the markets will start to kind of price in that, you know, better outcome and sort of be more forward-looking assumptions. And that could provide, you know, a little bit more of a tailwind for equities to continue to move higher, assuming, again, that the trade deals, progress on trade fronts, you know, continue to progress. The AI theme and the thesis that we like, and as a result, the tech sector that is attractive to us, you know, the data we've gotten the past two weeks from corporate earnings are consistent with that.
We think there's continues to be sort of more upside in that sector. Then within the fixed income, we've seen rates actually decline a decent amount to 10-year. Treasury yield got below, you know, 1.0, you know, 4.2%.
We do think there's going to be sort of range-bound and a certain risk of the economy ends up being okay. You know, breakout expectations get dialed back, you know, going forward, that the 10-year could easily move back towards, you know, 4.5%, so we'd be cautious on taking a lot of interest rate risk and staying to a higher quality overall. And finally, something that we've, you know, kind of advised repeatedly is that gold is attractive as a diversifier.
It has pulled back a little bit recently, given what appears to be a better kind of risk environment overall, but again, if that proves to be somewhat competing, then gold could have another, you know, like higher, so it has fundamental support as central banks around the world continue to sort of diversify. So it's a bit of good to two weeks for investors to kind of recover some of their losses. Some of the good news that, you know, is perhaps already priced in for what could happen, but not, maybe not speaking of bad news, and it'll be volatilities that we've seen, even on both the downside and upside, that's likely to persist, so I think investors should not assume that we're in the all-clear because certainly the new fall in tariffs in particular could change very, very quickly.
Well, Jason, as always, a very helpful touch base on what's driving market momentum, thoughts on the state of the U.S. economy, what to expect going forward, and of course, guidance when it comes to asset allocation. So again, Jason, thank you for joining our listeners, our clients today from Switzerland. Do hope you enjoy your travels overseas and look forward to picking back up with our conversation again soon.
You're welcome. Have a great week. You as well.
Thank you, Jason. Again, today we've been joined by Jason Draho, the head of asset allocation for the Americas with the UBS Chief Investment Office. For you, our listener, do want to point you once again to Jason's latest blog, which we have been making reference to on today's podcast.
A title is What If, now available up on UBS.com forward slash CIO. For clients of UBS, please reach out to your UBS financial advisor if you would like to receive a copy of Jason's blog directly. From UBS Studios, I'm Dan Cassidy.
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