UBS Expects Soft Landing

Despite recent market volatility and concerns over persistent inflation, UBS remains confident in its base case scenario of a "soft landing" for the US economy, according to the bank's latest daily report. UBS anticipates a cooling of both economic growth and inflation, paving the way for the Federal Reserve to begin cutting interest rates before the end of the year.

Tuesday's market sell-off, triggered by a higher-than-expected reading for the employment cost index (ECI) and a decline in consumer confidence, has fueled speculation that the Fed might adopt a more hawkish stance. However, UBS believes a significant shift in the Fed's approach is unlikely, as officials have consistently indicated that rate cuts are not imminent.

While acknowledging that inflation remains a concern, UBS points out that the overall trend is more encouraging than individual data points might suggest. The report notes that most measures of US wage growth have moderated in recent months, and although first-quarter PCE inflation data exceeded expectations, the monthly figures do not indicate a clear acceleration of inflation.

UBS also anticipates a slowdown in consumer spending as rising interest rates incentivize saving and limit the potential for further declines in the savings rate. However, the report emphasizes that rising labor income should provide support for spending, leading to a gradual slowdown rather than a sharp decline.

Based on these factors, UBS maintains its forecast for two 25-basis-point Fed rate cuts in 2024, likely starting in September. The bank expects 10-year US Treasury yields to decline to 3.85% by year-end and projects the S&P 500 to reach 5,200. This outlook reinforces UBS's preference for quality stocks and fixed income, with a focus on identifying equity opportunities both within and beyond the technology sector.