UBS Strategy Insights on Rate Cuts

Investing.com — Investors should continue to position for rate cuts despite recent resilience in the US economy, according to UBS strategists in a Monday note.

Key Points:

• The strong September jobs report indicated the US added 254,000 jobs, exceeding expectations; initially, this tempered market predictions for Federal Reserve rate cuts and boosted the chance of a soft landing.
• However, UBS believes the US economic data is not robust enough to halt the Fed’s contribution to the global rate-cutting cycle.
• Inflation data does not impede further Fed rate cuts aimed at bolstering US growth.

Inflation Overview:

• August's personal consumption expenditures (PCE) index, the Fed's preferred inflation measure, slowed to 2.2%, the lowest since early 2021.
• Although the consumer price index (CPI) showed higher rent-related inflation, UBS notes that the PCE gives greater weight to owners' equivalent rent, which remains unexpectedly high despite modest rent increases.

Market Outlook:

• With ongoing geopolitical tensions and expected market volatility ahead of the upcoming US election, UBS strategists suggest investors prepare for choppy markets and lower rates to accommodate a lower-growth, lower-inflation environment.
• UBS forecasts a 50 basis point cut in Fed rates over the last two meetings of 2024, followed by an additional 100 basis points in 2025.
• This forecast could adjust if progress on inflation stalls or if the labor market remains robust, but gradual easing is the base case as inflation declines.

Equity Projections:

• UBS believes a combination of a soft economic landing and Fed rate cuts could propel the S&P 500 to approximately 5,900 by the end of 2024 and 6,200 by mid-2025.
• They emphasize that growth stocks, particularly those related to AI, will be essential for long-term returns.

Investment Strategies:

• Investors should leverage potential volatility in the tech sector to acquire positions in AI-linked areas like semiconductors, US megacaps, and key Chinese internet firms.
• UBS advocates focusing on quality growth stocks within the tech, consumer, healthcare sectors, and those related to energy transition and in Japan.