What's takeaway 1 on Top of the Morning?

S&P 500 entered correction territory, down over 10% from recent peak.

What's takeaway 2 on Top of the Morning?

Policy uncertainty, particularly regarding tariffs, is driving current market volatility.

What are the market implications for Top of the Morning?

Traders should keep a close eye on the upcoming CPI data, as its results could catalyze further market movements. Notably, the 1.075 level in the consensus target could act as a pivotal point for positioning in both equities and FX markets.

What are the risks to this view on Top of the Morning?

Any sign of policy stabilisation or unexpected positive economic data could reverse the current bearish sentiment, pushing markets away from their correction phase. Additionally, a reversion in the Policy Uncertainty Index might provide the confidence needed for equities to recover.

Top of the Morning: The week in review and preview

What the desk is arguing

The desk interprets the current correction in equities, illustrated by the S&P 500's fall of 10% from its peak, as a reaction to mounting policy uncertainty, particularly around tariffs. Per the full note from UBS, this volatility appears alongside an elevated spike in the Baker, Bloom & Davis Policy Uncertainty Index, which highlights a broader unease among investors as they respond to external economic pressures.

The data points provided by UBS reveal that other indices, such as the NASDAQ, are facing even steeper declines around 14%. This suggests that the correction may extend beyond merely a stock market adjustment, indicating potential implications for risk sentiment broadly across markets.

Where it sits in our coverage

Our consensus target remains at 1.075, with a range between 1.04 and 1.12. Firms such as JPMorgan and BofA provide diverging views, reflecting the tension in market sentiment: - jpmorgan: 1.10 (Mar26) - bofa: 1.04 (Mar26)

This view is closely aligned with jpmorgan, which shares a similar cautious outlook, while diverging from bofa’s more bearish stance, particularly at the lower end of our range.

How other firms see it

Market perspectives are split; firms like jpmorgan and others anticipate a cautious recovery, while bofa remains skeptical about immediate rebounds. The disparity in outlooks reflects broader market uncertainty shaped by inflation and policy rates.

Monitoring pairs like USD/JPY could provide further insights into the unfolding dynamics, as its trajectory often mirrors shifts in US monetary policy. Additionally, the potential impact of future CPI releases will likely influence how these firms adjust their positions in response to evolving data.

Hi everyone, Siobhan Chapman here, and welcome to Top of the Morning on the UBS Market Moves podcast channel. It's Friday morning, which means it's time for the Week in Review and Preview conversation, where my guests will recap how markets have performed over the past few sessions and previews you can expect in the week ahead. Today's conversation will primarily focus on CIO's outlook for equities and February inflation prints.

Joining us for the conversation, I'm glad to welcome back Matthew Tormey, Equity Strategist Americas with the UBS Chief Investment Office. Matt, welcome. We're happy to have you.

Hey, good morning, Siobhan, and thanks for having me back. Of course. So let's get started.

It's been a turbulent week for equity investors. As we speak here on Friday morning, can you put some numbers around the losses and speak to the most impacted sectors, and also recap the factors that drove the selling pressure? Thanks, Siobhan, certainly.

So as of yesterday's close, I would say that the most important point to note is that the S&P 500 officially entered correction territory, as it's now down a little more than 10% from its recent high last month. Looking at other major indices, the NASDAQ is down nearly 14%. Large cap growth is down a similar amount.

Large cap value is down about 7%, and small caps are down nearly 13% over the same time horizon. Now, the question we need to address is exactly what you asked, Siobhan, and that's what's been driving this sell-off. And at a high level, we think that this has been all about policy uncertainty and tariffs.

So if we take a look at the Baker, Bloom & Davis Policy Uncertainty Index, it's really spiked in the past few months to levels we last saw more than 10 years ago, but not quite the COVID levels. And this spike in uncertainty did come at a time when positioning and sentiment were already pretty elevated, but fortunately in the past few weeks, a lot of this has been cleaned up. So one way to look at this from a positioning perspective is to look at how momentum stocks have been performing, and the recent poor performance is highly unusual, and it usually doesn't get much worse than this, except for during the Great Financial Crisis or COVID.

And from a sentiment perspective, if we look at the American Association of Individual Investors survey, less than 20% of investors are bullish, which is a very low reading. So looking at S&P 500 returns following the recent performance from momentum stocks and now very poor sentiment from investors, you tend to see positive returns, which is encouraging. Now I just want to quickly touch on tech and what the notable factors have been driving recent performance since we are getting a lot of questions on this, and we point to three reasons, fundamentals-related noise, geopolitics, and tariff uncertainty.

So on the first point on fundamentals, we do think that they continue to be healthy following the fourth quarter earnings results season, but the emergence of low-cost models such as DeepSeek and most recently Manus have led to some concerns around excess data center build-outs, and this has driven some volatility. And then I just want to touch on the last point too, which is tariff uncertainty, as we do think this has been the biggest driver of weakness in the tech sector, as many tech companies supply chains are relocating to Mexico, so additional clarity here would be very helpful. So taking all of the volatility into account, our main message doesn't change all too much, and that is the risk-reward for equities continues to be attractive, and we should see good returns for stocks after we move past this period of heightened policy uncertainty.

Thank you so much for that overview, Matt. So what is CIO's outlook for equities at this time, and what are your recommendations when it comes to equity positioning? Of course.

So despite the spike in volatility that we've seen over the past month, we do still continue to have an attractive view on U.S. equities and believe investors will ultimately get the policy clarity we're looking for that should drive a recovery in stocks. So from a positioning standpoint, no changes at this time within U.S. equities. We do continue to have a most attractive view on information technology sector and attractive views on communication services, consumer discretionary, financials, health care, and utilities.

And from a size and style standpoint, we do like both large-cap value and growth stocks while exhibiting a preference for large caps over mid and small caps. Now outside of the U.S., we did make three notable equity changes that I wanted to highlight today. After the markets closed on Monday, we did decide to step to the sidelines on Asia ex-Japan, China technology, and German equities.

So first, for the rationale of moving Asia ex-Japan from attractive to neutral, the market has been supported by healthy fundamentals, including expansionary regional PMIs and expectations of high single-digit earnings growth this year. However, uncertainty regarding tariffs that could weigh on Asia's export cycle, signs of a slowdown in the U.S. that could further weaken Asia growth expectations, and valuations that stand slightly above historical levels could limit the near-term upside. Second, we did downgrade China tech from attractive to neutral after such a strong rally since the start of the year that was driven by enthusiasm around recent AI success and the National People's Congress special emphasis on AI development.

But now following this rally, it's our belief that the market appreciates the potential for China internet stocks, and likely further tariff escalation between the U.S. and China could leave structural concerns unaddressed. And lastly, our tactical call around German equities has largely played out, which did include pro-growth policies following the German election and a cyclical recovery in manufacturing. So with the DAX having experienced strong performance already year-to-date, we prefer to be more selective in our approach when it comes to investing in Europe.

I want to discuss the data calendar for just a moment. So we did receive the February inflation prints, and with inflation of course being a notable point of interest for investors, what did the data reveal? Yeah, so this week we did receive a couple inflation prints.

So we had the CPI and PPI readings. Starting with CPI for February, encouragingly the month-over-month and year-over-year readings for both the headline CPI and core CPI came in softer than consensus expectations and reinforced the broader disinflationary trend. And I'd say there were two notable takeaways from the print.

First, annual core inflation, which does exclude volatile food and energy prices, rose 3.1%, which is the slowest pace since September 2021. And second, shelter costs, which have been a major driver of inflation, continued to ease after rising 4.2% annually, and this is the smallest increase in over two years. Now for PPI, similar to CPI, the readings were softer than consensus expectations across the board.

But unfortunately, this wasn't enough to get the market too excited as U.S. equities still traded quite a bit lower on the day. So in our view, we continue to believe that the broader disinflationary trend and durable economic growth will put the Fed in a position to cut rates by 50 basis points this year. So we are coming to the end of our conversation, Matt, and I want to turn to next week.

What is taking place that investors should be mindful of? So next week, it is a pretty busy week on the economic calendar, and believe it or not, we'll start to hear from some of the early reporters for the first quarter earnings season. So starting on Monday, we will receive the February retail sales report with expectations pointing towards a positive month-over-month reading after a pretty disappointing report last month.

Additionally, we will receive the March Empire State Manufacturing Index reading, which could see a slightly weaker reading than the prior month. And finally on housing, the NAHB Housing Market Index reading for March is expected to see a slight uptick. On Tuesday, more on housing with the February housing starts and building permits readings, and we'll also receive the industrial and manufacturing production readings, which are expected to come in at a small negative month-over-month reading.

On Wednesday, the highlight of the week will be the March FOMC meeting, and the market is not currently pricing an array cut, but it will be interesting to see how the Fed's thinking has changed on the economic outlook with the release of their summary of economic projections, which last time we saw was in December. On Thursday, it is a bit of a mixed bag of data. We'll receive, as usual, the weekly initial jobless claims and continuing jobless claims data, which we believe is very important to keep an eye on.

On manufacturing, the Philadelphia Fed Manufacturing Index will give us another gauge of manufacturing conditions, and similar to the Empire Index early next week, it's expected to see a slightly weaker reading. On housing, existing home sales for February are expected to be relatively unchanged versus the prior reading, and to round out the day and the week, the conference board's leading indicators index will give us a good sense of where we might be heading in the business cycle. And lastly, if I look at the earnings calendar for next week, it's pretty quiet in the first half of the week, but later in the week, we'll hear from companies such as General Mills, Accenture, Darden, Micron, Nike, FedEx, and Lenar.

So a pretty diverse set of companies, and it'll be interesting to hear the commentary they provide, given the amount of uncertainty in markets today. Okay, perfect, Matt. Thank you so much for joining us.

Yeah, thank you, Siobhan, and have a great weekend, everyone. to view the latest research. is a subsidiary of UBS AG and a member of FINRA SIPC. For information, please visit our website at ubs.com forward slash working with us. For a full legal disclaimer applicable to the independent investment views produced by UBS, please visit our website at ubs.com forward slash CIO dash disclaimer.

Transcribed by https://otter.ai

Top of the Morning: The week in review and preview

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Top of the Morning: The week in review and preview

What the desk is arguing

Where it sits in our coverage

How other firms see it

Sources & References

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