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Favorable Fundamentals Keep Equities on Track, UBS Says

US equities continued their upward trajectory last week, bolstered by signs of a cooling labor market, including higher-than-expected jobless claims, which fueled optimism for Fed rate cuts later this year. The S&P 500 has now recovered most of April's losses and sits just 0.8% below its all-time high set in March.

According to a note published by UBS on Friday, despite geopolitical uncertainties in the Middle East, the overall risk-return outlook for equities remains balanced thanks to a supportive fundamental backdrop.

The Swiss bank highlights several factors contributing to this positive outlook, including the anticipation of Fed rate cuts starting in September as inflationary pressures ease due to a softening labor market, moderating housing costs, and a slowdown in consumer spending growth.

Solid corporate earnings are another key driver, with the first quarter showing a healthy number of S&P 500 companies exceeding sales and earnings estimates and offering positive forward guidance. UBS forecasts 9% earnings growth this year, driven in part by AI-related advancements.

While acknowledging the risk of escalating conflict in the Middle East, UBS believes the situation will remain contained. Their base case remains that cooler heads should prevail, and conflicts in the region should not evolve into a war between Israel and Iran.

"We continue to see a supportive backdrop for equities and favor opportunities in quality stocks, including technology," notes UBS. "We advocate diversified allocation across key regions and see structured strategies as a way to gain more defensive exposure."