FX BANK FORECAST · COVERAGE
Aggregated year-end forecasts, scenario shifts, and curated analyst notes from 37 institutional desks. No promotion.
Per the full note from UBS , Paul Hsiao argues the U.S. economy remains fundamentally sound despite a weak labor market, with consumption robust and AI-driven investment set to accelerate into 2026. However, the Middle East conflict introduces upside risk to oil prices, potentially derailing the growth narrative. The desk sees markets repricing downside risks, with the S&P 500 down year-to-date.
The UBS Chief Investment Office strategist Paul Hsiao, in the latest CEO Macro Briefing podcast, argues the U.S. economy is still in good shape entering 2025, supported by resilient consumption and strong AI-related capital expenditure. He notes private jobs growth was essentially zero late in 2025 due to weak demand and supply constraints, yet the unemployment rate remains low. The key transmission channel for geopolitical risk is oil prices returning to triple-digit territory, which the S&P 500 has already begun to price in.
The desk leans on the fact that AI-driven private investment demand is set to accelerate in 2026 to meet energy needs, but the Middle East conflict could upend that trajectory. Hsiao emphasizes that this is the first time in years oil has a clear macro impact, contrasting with past episodes where the link was weaker. The implicit rejection here is that the labor market weakness is cyclical, not structural, and that consumption will hold up.
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Key takeaways
Market implications
Watch for oil price spikes above $100/bbl as a near-term catalyst for broader risk-off; USD may strengthen on safe-haven flows if escalation continues. Monitor U.S. 10-year yields for inflation breakeven repricing.
Risks to this view
A de-escalation in the Middle East would remove the oil price tailwind, reversing the equity selloff and potentially weakening the USD. If labor market data surprises to the upside, the Fed may delay cuts, reinforcing the current macro stability view.
Hi everyone, Dan Cassidy here. Welcome back to Top of the Morning on the UBS Market Moves podcast channel. I am joined today here in studio by Paul Hsiao, Asset Allocation Strategist for the Americas with the UBS Chief Investment Office.
Paul, as you know, is also the lead author of the ongoing CEO Macro Briefing book series from the UBS Chief Investment Office comes out, Paul, on a quarterly basis. And of course, you've spent plenty of time with us here on the podcast to talk about this series in the past, but very timely that you're joining us today. I know there's a lot going on in the macroeconomic environment, the geopolitical environment that would be of interest to those who consume the CEO Macro Briefing book.
So you're joining us today to update us on a wide range of topics. So perhaps we could begin with how markets have been reacting to the latest macroeconomic data. What have you picked up on, Paul?
Sure. As we start off the year, I think it's coming clear to us that the U.S. economy is still fundamentally in a pretty good place. Yes, the labor market has been quite weak, and that's something that has been reaffirmed by Chair Powell in the most recent FOMC announcement saying that private jobs growth has been essentially zero towards the end of 2025 due to lack of demand and lack of supply.
But overall, the unemployment rate still remains quite low. Consumption remains robust, and the private investment demands from a lot of companies due to the AI trade still remains quite in a good spot and set to accelerate in 2026 to meet energy demands. That all said, obviously the conflict right now in the Middle East has a potential to upend some of this trade, and we have seen markets react appropriately with the S&P down year-to-date.
Part of the reason is because there's a clear transmission mechanism this time around with oil prices going back to triple-digit territory, something that we haven't seen for quite some time. So unlike the conflict in Ukraine and the conflict between Israel and Gaza, the conflict in Iran, I think, has a much more clear market impact because of that oil transmission. And domestically, that has the capacity also to hurt consumers who already are complaining from affordability crisis met with another sort of price increase in addition to the tariffs that were announced last year.
So Paul, you mentioned the ongoing U.S.-Iran war. As we're recording, it's important to note Monday, March 23rd, because this is indeed a very fluid situation, still ongoing. Talk to us a bit about how business owners should be thinking about this current geopolitical environment, which, as mentioned, very fluid.
I think one thing that has been interesting for us is what we have done is we took a measure of volatility, the VIX Index, relative to something called the Geopolitical Risk Index that you can find on Bloomberg, basically how risky are headlines right now. And what we found over the Trump second term so far is that markets have been underreacting to very vast amounts of geopolitical uncertainty until the Iran crisis, where you did see this clear transmission mechanism. I think from a business owner perspective, what you can expect from now, but depending on how long the conflict goes on for, is the increased risk of supply chain issues, which we haven't seen since 2022 with the freight indices really coming down in 2023 and 2024 and staying at low territories.
And we're seeing those prices creeping back up. The increased cost of raw materials as the price of oil has ripple effects down the supply chain. Another dent to the AI trade, I know that the AI trade has lost some of its shine in the last couple of months, but because this makes input costs more expensive and investors are becoming having a little more scrutiny over the energy demands, the vast energy demands that these more complex AI models demand, having higher energy prices certainly has a dent towards that overall trade.
So I don't want to say it has taken a backseat, but the AI trade perhaps not as front and center as it was a month ago, as we're continuing to monitor these geopolitical developments in the Middle East. The latest CEO macro briefing book talks about the next leg of the AI trade. What does that look like from your perspective, Paul?
Yeah, I think we can look at this from really two perspectives. One is from a market perspective where the chief investment office has been calling for a broadening of market performance. Obviously we've seen hyperscalers and even private valuations of the LLMs really go to astronomical territories over the last couple of years.
And really we think that that's the first leg of the AI trade, those investing in the picks and shovels of the AI gold rush, so to speak. And we think that the next leg of the AI trade would go to the parts of the market that we think have been underappreciated, sectors like healthcare, financial services to some extent, even consumer discretionary, where you see more of these companies taking advantage of these productivity enhancing abilities of these AI tools really taken to the enterprise scale. I think adoption has been quite – it's hard to get a grasp of adoption numbers.
If you look at some private surveys, it's anywhere from 80% for larger companies. The Census Bureau has a survey where it asks businesses across America, are they using AI? And I think it's still quite in low territories, I think below 30%.
But the trend lines I think are the things that we should notice from these two surveys, which is going up. The Census Bureau had AI usage double from 2023, a similar increase in private market surveys. So I think AI is here to stay.
It's becoming more and more adopted in a corporate environment. And the question is how much productivity enhancing benefit will be translated to some margins. And I think that's the big question for the next leg of the AI trade and also a consideration for our business owner clients.
One other topic, I wanted to spend some time on the domestic political environment. We're getting closer and closer to the highly anticipated midterm elections coming up in November. Does that have any impact on the markets right now?
I think this is another area of uncertainty, but perhaps to the upside. And the reason why I'm saying that is if you look at history, and admittedly there aren't too many data points, but markets tend to perform the best when you have a Republican president, a Republican Senate, as well as a Democratic House. So there is a sense of checks and balances.
And I think part of that market reaction has become stronger over the last couple of cycles just because of the increasing trajectory of the U.S. debt. Usually if you have opposition in power, that could have a check on increased spending programs. So you'll have less likelihood of things like the OAAA that was passed by Republican House, Senate, and President that happened last year, which to many estimates have put the debt in a more unsustainable path.
So opposition in power tends to put a check on those limits. But in terms of just looking at historical behavior, markets tend to be flat-ish during a midterm year until October, November, where you have more certainty and then you have much more performance gain there. I think this time around for the midterms, it seems like a foregone conclusion that the Democrats have a pretty good advantage for the House.
The real question mark is whether or not that they have the ability to take a Senate, as the White House right now has a clear unfavorability rating. And I think the higher energy prices due to the Iran war certainly don't help those affordability concerns that are faced by American households. But we think that odds like polymarket might be overestimating democratic odds right now, which is anywhere between 40% to 50% just because of the math.
They have a lot of Senate seats. I think about five net Senate seats to win, which is a pretty tall task for any opposition party. But in general, what we're saying is that midterms, yes, there'll be another uncertainty point.
But generally, the most likely outcome historically tends to be the best for markets. And because it has that checks and balances and also institutional credibility reaffirmation that I think investors are looking for. Well, Paul, very helpful touch base today, hitting on a range of factors, topics, top of mind for investors.
And again, I do want to point our listeners, our clients to Paul Hsiao. He's the lead author, again, of the CEO Macro Briefing Book Series from the UBS Chief Investment Office that comes out on a quarterly basis. Keep an eye out for updates which are made available up on UBS.com slash CIO.
And of course, reach out to your UBS advisor if you would like to receive a direct copy of the latest CEO Macro Briefing Book. Paul, thanks for dropping by in studio. Great catching up with you.
Thanks for having me. Thank you for tuning in. Be sure to visit UBS.com slash studios to view the entire UBS studios suite of podcast channels along with our video offerings, such as UBS Trending.
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