UBS is framing the current bout of Middle East risk as a headline distraction rather than a fundamental threat to equities, arguing both Washington and Tehran have strong incentives to avoid a full return to war. The bank’s focus is squarely on the second-quarter earnings season, where early bank results and a projected acceleration in profit growth support a constructive stance on US stocks. Investors are likely to weigh the bank’s bullish earnings call against near-term volatility tied to the Strait of Hormuz standoff, with UBS advising diversification rather than a retreat from risk.
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UBS says strong and broadening earnings growth, not Middle East tensions, will keep driving US equities higher over the next year.
Summary:
- UBS expects further hostilities around the Strait of Hormuz remain likely near term, but sees both sides avoiding a full return to war given the incentives behind last month’s memorandum of understanding
- The bank forecasts S&P 500 earnings growth accelerating to around 28% in the second quarter, with all 11 sectors expected to post profit gains
- Semiconductor firms are seen driving a large share of that growth, with UBS estimating AI-related capex will rise 68% this year to about USD 820 billion, then a further 21% next year to near USD 1 trillion
- UBS expects the median S&P 500 company to grow earnings by around 12%, helped by an improving manufacturing backdrop and a six-month run of expansionary ISM readings
- Consumer spending is seen holding up despite an uneven trend across income groups, supported by low unemployment and a manufacturing sector that has resumed hiring
- UBS reiterates a 12-month S&P 500 target of 8,200, and advises investors to diversify as market leadership broadens and to weigh capital preservation strategies
UBS forecasts the S&P 500 will climb to 8,200 by June 2027, arguing that strong and broadening corporate earnings, rather than escalating Middle East tensions, will remain the dominant driver of US equity performance over the coming year.
In a note to clients, the Swiss bank said neither Washington nor Tehran appears willing to make concessions over control of the Strait of Hormuz, keeping the risk of further hostilities elevated in the near term. Still, UBS believes both sides will ultimately avoid a full return to war, since the incentives that produced last month’s memorandum of understanding remain in place: a prolonged closure of the waterway would hurt the US economy, while the naval blockade already cuts off a key income source for Iran’s regime.
Against that backdrop, UBS said geopolitical swings may still cause short-term setbacks in equities, but earnings will remain the more important driver for the rest of the year. The bank pointed to a strong start to second-quarter results from major US banks and forecast overall S&P 500 earnings growth accelerating to around 28% for the quarter, with all 11 sectors expected to post profit increases.
Semiconductor companies are expected to account for a large share of that growth, reflecting continued strength in AI infrastructure spending. UBS estimated total AI-related capital expenditure will rise 68% this year to roughly USD 820 billion, followed by a further 21% increase next year to nearly USD 1 trillion. The bank does not expect another round of upward guidance revisions this quarter following aggressive upgrades previously, and flagged a rising risk of disappointing capex growth beyond 2027, though it said near-term spending cuts remain unlikely given rising rental prices for AI chips, ongoing supply chain constraints and continued heavy capital raising tied to AI investment.
Earnings strength is expected to broaden beyond chipmakers as well, with UBS projecting the median S&P 500 company will grow profits by around 12%, aided by a pickup in industrial activity. The bank noted the ISM Manufacturing index’s new orders component has now been in expansion for six consecutive months, a pattern that its analysis shows has historically been followed by roughly 18 more months of expansion, suggesting further upbeat commentary from manufacturers ahead.
UBS also pointed to a resilient labor market underpinning consumer spending, even as that spending remains bifurcated between higher and lower-income households. The bank noted unemployment remains low and new jobless claims are near multi-decade lows, while manufacturing employment has begun recovering after cuts between 2023 and 2025.
Taken together, UBS said the combination of strong earnings, resilient consumer spending and an improving industrial backdrop should keep driving US equities higher over the next six to 12 months, while advising investors to diversify as market leadership broadens and to weigh capital preservation strategies given lingering geopolitical risk.
This article was written by Eamonn Sheridan at investinglive.com.