After months of resilient markets, investors could face another test in the second half of the year as expectations grow that the US Federal Reserve may need to keep interest rates higher for longer.
UBS Asset Management believes equities can continue to climb despite the prospect of further monetary tightening.
In its latest Macro Quarterly, the firm argues that strong corporate earnings, an improving global economy and broadening market leadership should be enough to offset the headwind of higher rates.
The asset manager expects lower oil prices to ease headline inflation, but says underlying US inflation is likely to remain sticky, keeping the possibility of further Fed rate hikes firmly on the table.
Even so, it believes higher borrowing costs are unlikely to derail the equity bull market while earnings remain robust and extend beyond the technology sector.
2026 global equity outlook: The year diversification works gain
Evan Brown, head of global multi-asset strategy and portfolio management, Americas and Asia at UBS Asset Management, said: “We remain overweight equities and prefer emerging markets and Japan, where our leading indicators point to the strongest earnings growth.
“Maintaining exposure to AI-linked stocks makes sense given surging earnings growth, but increased crowdedness and growing participation in leveraged single-stock ETFs highlight the need for diversification.”
UBS also remains cautious on US government bonds, arguing sticky inflation and a more hawkish Federal Reserve leave US duration vulnerable.
Brown added: “Sticky US inflation and a more hawkish Fed leave us cautious on US duration, and we expect US Treasuries to underperform equities as the rates market increasingly skews toward rate hikes. However, we do see value in UK and Australia duration as those economies cool.”
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