UBS Strategists on US Treasury Yields and Stock Market

Investing.com — UBS strategists, led by Andrew Garthwaite, have indicated that a 5% yield on the US 10-year Treasury would mark a negative turning point for equities.

They also suggest a 35% chance of a stock bubble, which could occur when bubble areas in the global market reach at least 30% of the global market cap. This scenario would be accompanied by a price-to-earnings (P/E) ratio of at least 45x and a bond yield of no less than 5.5%.

The team noted that the ‘Mag 6‘ tech stocks, which include Amazon (NASDAQ: AMZN), Apple (NASDAQ: AAPL), Alphabet (NASDAQ: GOOGL), Nvidia (NASDAQ: NVDA), Meta (NASDAQ: META), and Microsoft (NASDAQ: MSFT), currently boast a P/E ratio of 34x.

UBS highlighted that the best-performing region during rising Treasury Inflation-Protected Securities (TIPS) yields has historically been Japan, in terms of local currency. Conversely, the Global Emerging Markets (GEM) have been the worst-performing region in dollar terms, with the US typically underperforming in such scenarios.

UBS strategists expect US bond yields to decrease to 4.25% by the end of the year. Consequently, they recommend staying underweight on non-financial cyclicals, which correlate 62% of the time and are priced in with very high Purchasing Managers’ Index (PMI) values. These stocks also trade on near-record P/E and price-to-sales (P/S) relative to defensives, against a backdrop of deteriorating relative earnings revisions.

The strategists favor defensives with low financial leverage, such as SAP, Microsoft, BAE Systems (LON: BAES), Tesco (OTC: TSCDY), Leonardo, Abbott, and DSM. They also recommend buying UK bond/rate-sensitive risk, such as utilities and real estate, which they see as very cheap, oversold, and the most sensitive sector due to their belief that UK yields across the curve are too high and should recede.

UBS cited stocks including SSE (LON: SSE), National Grid (LON: NG), Persimmon (LON: PSN), Land Securities (LON: LAND), and UK homebuilders in general, which are discounting a 5% fall in house prices. As of Thursday, the 10-year Treasury yield was at 4.62%, showing little change on the day.

This article was generated with the support of AI and reviewed by an editor. For more information see our T&C.