UBS's Chief Investment Office maintains an "attractive" rating on equities despite persistent inflation pressures, arguing that solid corporate earnings fundamentals justify continued exposure to risk assets over the medium term.
The bank expects the S&P 500 to climb to 7,900 by year-end from 7,560 currently, supported by resilient economic activity and a forecast 20% earnings-per-share growth for 2025.
US first-quarter results have underlined the strength of corporate performance, with underlying earnings growing 19%, the fastest pace in four years, and around 80% of companies beating sales and earnings estimates.
However, inflation remains elevated, complicating the path to Federal Reserve rate cuts.
The April PCE report, the Fed's preferred inflation gauge, showed headline and core inflation rising to 3.8% and 3.2%, respectively, both reaching three-year highs.
UBS has pushed back its expectation for Fed easing to December, followed by another cut in March 2027, citing persistent upward pressure from artificial intelligence-related software pricing.
The bank believes the Fed will maintain a patient stance in the near term, with trend wage growth below 3.5% and inflation expectations remaining anchored.
Government debt burdens pose a longer-term risk that investors should monitor carefully, UBS warns.
The US general government deficit is approaching 8% of GDP, and simulations suggest the net cost of debt could rise to nearly 19% of general government revenues by 2031, compared with 14% in IMF projections.
This could create a feedback loop where higher debt costs increase issuance needs, pushing yields higher and further raising borrowing costs.
Despite these risks, UBS advises investors to remain disciplined on duration and portfolio construction rather than abandon risk assets entirely, recommending that exposure to equities be balanced with portfolio diversifiers such as gold.
The bank favours equity exposure across regions and themes while focusing fixed income exposure toward the shorter end of the curve.
UBS also flagged concentration risks in US equities, with the surge in top technology stocks leaving many portfolios in need of rebalancing.
Asia presents attractive opportunities, with the bank expecting MSCI Asia ex-Japan profits to rise 62% this year.