UBS Maintains Positioning for Rate Cuts Despite US Resilience

Investing Outlook: Preparing for Rate Cuts Amid Economic Resilience

Investors are advised to continue adjusting their strategies in anticipation of potential interest rate cuts, despite recent indications of resilience in the U.S. economy, according to strategists at UBS.

The release of a robust September jobs report, which revealed the creation of 254,000 jobs—significantly surpassing expectations—initially tempered market forecasts regarding Federal Reserve rate reductions and increased speculation about a soft economic landing. However, UBS maintains that the U.S. data is not sufficiently robust to suggest an end to the Federal Reserve’s role in the global trend of rate cuts.

The bank underscores that inflation figures provide minimal resistance to further Federal Reserve rate adjustments aimed at fostering U.S. economic growth. The August personal consumption expenditures (PCE) index, favored by the Fed for measuring inflation, decelerated to 2.2%, the lowest level since early 2021. Although the consumer price index (CPI) has indicated rising inflation tied to rents, UBS clarifies that the PCE gives more weight to owner-equivalent rent, which continues to be higher than anticipated despite signs of moderation in rental increases.

In light of ongoing geopolitical tensions and anticipated volatility as the U.S. election approaches, UBS strategists argue that the market environment calls for preparation for more turbulent conditions and lower rates designed to recalibrate monetary policy in a low-growth, low-inflation landscape.

Despite the apparent strength in the U.S. economy, reflected in robust employment and consumer spending figures, UBS projects that the Federal Reserve will implement a 50 basis point reduction in interest rates over its final two meetings of 2024, followed by an additional 100 basis points cut in 2025. While the trajectory of these cuts may alter depending on inflation trends or labor market performance, their baseline forecast leans towards gradual easing as inflation declines.

Consequently, UBS encourages investors to start positioning themselves for a lower-rate environment. They anticipate that a combination of a soft economic landing and Federal Reserve rate cuts could propel the S&P 500 to approximately 5,900 by the end of 2024 and 6,200 by mid-2025.

The firm highlights the importance of growth stocks, particularly those associated with artificial intelligence (AI), as essential drivers of long-term returns. They note that while growth and geopolitical uncertainties may induce volatility in the tech sector, this should not overshadow AI’s potential as a significant return generator in the coming years.

Investors are encouraged to leverage any potential fluctuations in the tech sector to accumulate shares in AI-related industries at reduced prices, focusing on semiconductors, large-cap U.S. firms, and select Chinese internet leaders. Additionally, UBS recommends exploring high-quality growth stocks in the technology, consumer, and healthcare sectors, as well as those involved in the energy transition and opportunities in Japan.