US Equities Poised for Further Gains Amidst Favorable Backdrop: UBS

Despite reaching all-time highs, US equities show further potential for growth, buoyed by strong underlying fundamentals, according to a recent note by UBS. The S&P 500 and Nasdaq have climbed nearly 7% and 10% respectively since their mid-April lows, fueled by renewed hopes for Federal Reserve easing and positive market sentiment.

While upcoming earnings from companies like NVIDIA are eagerly anticipated, the Swiss bank argues that several key factors underpin the positive outlook for US equities.

"We believe US equities are supported by several fundamental factors," UBS states.

The US economy, while experiencing a moderate slowdown, remains robust, pointing towards a "soft landing" scenario. UBS highlights that data measuring actual economic activity, rather than sentiment indicators, suggest continued growth, albeit at a slower pace. This favorable economic outlook should allow the Federal Reserve to begin cutting interest rates later this year, supporting both corporate profits and equity markets.

Furthermore, the first-quarter earnings season revealed a broadening of profit growth beyond the mega-cap tech giants. Excluding a few anomalies, the first three months of 2024 marked the first quarter of positive year-over-year earnings growth for S&P 500 companies excluding the "Magnificent Seven" since the end of 2022. UBS expects this continued improvement in earnings growth to further bolster equity performance in the coming months.

The note also highlights the transformative potential of artificial intelligence (AI) as a key driver of future growth. With major tech companies investing heavily in AI research and development, UBS anticipates robust earnings growth for AI-related companies and the broader technology sector in the years to come.

"AI is disrupting traditional industries, from video-making and music, to education, to name a few," the report points out. "We see strong earnings growth ahead for AI-related names and the broader global tech sector."

Given this favorable backdrop, UBS remains optimistic about the trajectory of US equities, urging investors to maintain a strategic allocation to technology stocks while also exploring opportunities in small- and mid-cap companies, as well as growth themes like the low-carbon transition, healthtech, and the ocean economy.

"We see a favorable backdrop for equities and believe that macro and micro factors alike should support markets to keep grinding higher," UBS concludes.