UBS’s call gives investors a reason to look past this week’s chip-led selling. With semiconductors expected to deliver around half of index earnings growth, results from chipmakers and hyperscalers are the main test of the bullish view. The bank’s sector read favours industrials and AI-linked names over freight-heavy retailers and travel stocks, where energy costs bite hardest. Oil is the key risk. A further spike tied to Gulf escalation would widen the margin squeeze for goods sellers and test UBS’s view that the hit to overall profits stays limited. Today’s US CPI report is the near-term hurdle, since a hot core reading would push yields higher and weigh on richly valued tech.
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Earlier:
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UBS argues the AI boom and a sturdy economy can carry US profits, and stocks, through high oil prices and rising yields.
Summary:
- UBS forecasts S&P 500 earnings per share growth of around 28% for the third quarter, supported by AI demand, firmer cyclical sectors and resilient consumer spending
- AI-related spending is estimated to rise more than 80% this year to around $900 billion, and UBS expects semiconductors to account for about half of S&P 500 earnings growth in the quarter
- Hyperscaler cloud revenue is seen growing close to 60% year on year, up from just under 50% in the June quarter
- Higher energy costs are a headwind for freight-exposed retailers, goods makers and travel firms, but UBS sees a limited hit to overall profits
- UBS says refinancing risk is manageable despite a rise of more than one percentage point in the 10-year Treasury yield this year
UBS expects a strong third-quarter earnings season to give US equities room to climb, arguing that artificial intelligence spending, healthy cyclical demand and resilient consumers outweigh the drag from high energy prices.
The bank forecasts earnings per share growth of around 28% for S&P 500 companies in the September quarter. Its view comes after a cautious start to the week, when technology shares led US stocks lower and the Philadelphia Semiconductor Index fell almost 3% as investors waited for inflation data and earnings, with elevated oil prices and geopolitical conflict also weighing on sentiment.
AI remains the main driver of profits, according to UBS. It estimates AI-related spending will rise by more than 80% this year to around $900 billion and expects semiconductor companies alone to deliver about half of S&P 500 earnings growth in the quarter. Although capital spending growth is forecast to slow next year, UBS said the investment appears to be paying off for the large cloud providers known as hyperscalers. It expects their cloud revenue to grow by close to 60% year on year in the quarter, accelerating from just under 50% in the June quarter, with consumer AI agents seen as the next source of demand.
UBS also expects profit growth to broaden beyond technology. The new orders component of the ISM manufacturing index has stayed in expansion for nine straight months, and the bank noted that such stretches have historically lasted about three years on average. That suggests further room for growth among manufacturers and sectors such as industrials.
Consumers should hold up, in UBS’s view. Higher energy costs may squeeze spending at the lower end, but with initial jobless claims near multi-decade lows, the bank expects labour market strength to prevent a meaningful slowdown in overall spending.
UBS acknowledged that higher energy prices are a headwind, particularly for retailers and goods manufacturers exposed to freight costs. Travel-related companies are already feeling the impact, and manufacturers may face higher input prices. However, the bank sees only a limited effect on aggregate index profits.
Rising borrowing costs are also manageable, according to UBS. The 10-year Treasury yield has climbed by more than one percentage point this year, but non-financial S&P 500 companies have a weighted average debt maturity of about 11 years, meaning little of their debt is resetting to higher rates. UBS expects volatility to persist but sees scope for US stocks to move higher on the back of still-strong profit growth.
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Some tech earnings ahead later this week:
Screenshot via earnins whisper.
This article was written by Eamonn Sheridan at investinglive.com.