UBS says the equity rally still has room to run, citing easing Strait of Hormuz oil risk, resilient AI-linked earnings, strong US manufacturing data, broadening earnings beats and a patient Federal Reserve. The bank's base case is that policy stays on hold unless core inflation stalls or energy and tariff risks intensify.
UBS strategists argue the rally's drivers remain intact, not just AI enthusiasm. The bank points to five supports for its constructive stance on stocks: easing geopolitical risk, resilient corporate earnings, strong economic data and a patient Fed.
Oil risk eases as Hormuz tensions cool
Progress toward reopening the Strait of Hormuz, even without a finalized agreement, has helped push oil prices lower and eased concern that energy costs could reignite inflation pressures. That reduced risk premium has let markets refocus on fundamentals rather than headline-driven volatility.
AI earnings split between winners and laggards
Corporate results still support the AI investment case, but investors are growing more selective about where value is created. Microsoft shares jumped after the company reported its fastest pace of cloud growth in four years, while Meta shares fell sharply after free cash flow dropped 91% to its lowest level since late 2022.
Manufacturing data beats expectations
US data added to the supportive backdrop. The ISM Manufacturing PMI rose to 55.6 in July from 53.3 in June, beating expectations of 54.0 and marking a seventh straight month of expansion. New orders grew solidly while cost pressures eased.
Earnings broaden beyond megacaps
UBS says earnings strength is becoming less concentrated in a small group of megacap tech names. Around 80% of S&P 500 companies have beaten expectations this season, above the historical norm of roughly 73%, with a median beat of 5.8% against a long-run average of 3.5%. The bank now expects second-quarter EPS growth of 30% or more, ahead of its initial 28% estimate.
Fed stays patient on rates
The Federal Reserve held its funds rate steady at 3.50% to 3.75% last week. According to Investinglive, Chair Kevin Warsh described the Fed's current stance as: "watchful thinking." Core CPI slowed to 2.6% in June, and UBS's base case is that the Fed stays on hold unless core inflation stalls or energy and tariff risks intensify.
Source: Investinglive
Trading involves risk.
Risk Disclaimer
