Market Pessimism Premature and Overdone: UBS

Despite recent market turbulence triggered by geopolitical tensions and rising bond yields, UBS believes the resulting investor pessimism is "premature and overdone," according to a research note published by its CIO office on Monday. The Swiss bank remains optimistic about a market rebound, citing strong US earnings growth and continued advancements in artificial intelligence (AI) as key drivers.

The note acknowledges concerns surrounding the chipmaking industry, particularly following a drop in orders at ASML Holding NV, a crucial supplier of equipment for advanced microchip production. However, UBS analysts downplay the significance of this development, attributing it to a single customer's temporary delay in purchases due to pricing negotiations.

"Without taking a view on individual stocks, ASML’s miss on first-quarter orders was largely due to one customer delaying its purchases amid pricing negotiations," the note states. "It should only be a matter of time before orders return, in our view, as AI chip production globally continues to scale up."

Furthermore, UBS highlights the robust performance of early US earnings reports, with nearly 60% of companies exceeding sales estimates and 75% beating earnings estimates. This reinforces their projection of a healthy 7-9% earnings growth for the quarter, extending beyond major technology firms and indicating a broadening of strong corporate fundamentals.

"We see signs that this earnings growth is likely to expand beyond the largest technology companies, auguring well for a broadening in better corporate fundamentals and potentially elevating some investor concerns about concentration risks," the note explains.

While acknowledging the potential for further market volatility, particularly amidst ongoing geopolitical events, UBS remains confident in a long-term positive trajectory for US stocks. They anticipate cooling inflation and potential Federal Reserve rate cuts in 2024 to support market recovery.

The bank maintains its year-end S&P 500 price target of 5,200, underpinned by projected 9% earnings growth, continued AI advancements, and robust corporate investments.

UBS also encourages investors to explore opportunities beyond the tech sector, including US small-cap stocks poised to benefit from the broadening earnings trend and attractive relative valuations.