What UBS’s daily note tells us about the bigger picture
UBS puts out a daily market note responding to whatever’s moved overnight, a recent edition was framed around a soft start to the week: hotter than expected US inflation data, AI executives calling for a slower pace of model development, and rising oil prices on fresh Middle East attacks. Most of that is noise that will be forgotten by Friday. But underneath the daily reaction, UBS makes three points that are worth holding onto regardless of what happens this week.
1. A Fed hike isn’t the risk. A stalling economy is.
The instinctive reaction to hotter inflation data is to worry that a Fed hike will hurt stocks. UBS’s own historical data suggests that’s the wrong thing to be watching. Rate hikes only become a genuine problem for equities once economic growth starts to falter, and looking back at market history, the two haven’t tended to move together, hikes and downturns have arrived on different timelines to each other. UBS notes the current backdrop remains resilient, pointing to eight consecutive months of expansion in the ISM Manufacturing PMI, a gauge of US factory activity, and says that expansions in that index have historically lasted nearly three years on average going back to 1950. Their base case is two more Fed hikes this cycle, which by their own modelling would only shave a few tenths of a percentage point off growth. The broader lesson: when assessing whether a hiking cycle threatens markets, the growth data matters more than the hike itself.
2. AI investment isn’t stalling, it’s facing calls for guardrails.
Recent comments from AI executives calling for a slower pace of advanced model development might read as a sign the AI capex boom is cooling. UBS reads it differently, as an attempt to shape a regulatory framework the leading labs can live with, rather than a genuine pullback in ambition. The evidence they point to is concrete: token volumes (a measure of how much AI infrastructure is actually being used) are up roughly 176% since the end of June, even as average pricing has fallen by about 42%, meaning usage is growing faster than the cost is falling. UBS keeps its forecast for AI capital expenditure rising 33% to USD 1.2 trillion in 2027. The takeaway for investors: distinguish between calls for regulation and evidence of a genuine slowdown in demand, they’re not the same signal.
3. Earnings growth is still doing most of the work.
Underpinning UBS’s constructive view is a fairly simple point: a growing economy supports growing corporate profits. UBS forecasts S&P 500 earnings growth of 25% this year and 14% in 2027, and argues that as long as a recession isn’t imminent, which they don’t expect given how shallow they think this hiking cycle will be, that earnings growth should keep supporting equity gains even through bouts of volatility. This is the number worth tracking over the more headline-grabbing daily data points: if the earnings growth forecast holds up, the bull case holds up with it; if it starts slipping, that’s the signal to reassess.
UBS’s own conclusion is that investors should stay invested through a diversified allocation spanning both structural themes (like AI) and cyclical opportunities, with regional diversification adding further resilience. Worth noting this is UBS’s house view and forecast, not a certainty, but the framework they’ve laid out, growth over hikes, usage over rhetoric, earnings over headlines, is a useful lens for reading market noise generally, not just this week’s.
This article was written by Eamonn Sheridan at investinglive.com.