UBS cuts Brent crude oil forecasts
UBS provided an analysis of the current market regime, earnings, valuations, and sentiment, suggesting that the relative outperformance of equities is likely to continue, particularly if there is a rotation towards consumer cyclicals.
The firm highlighted that the supportive business cycle in Europe, coinciding with expansion, typically aligns with upside for the Stoxx Europe 600 Index (SXXP). Despite forecasts of a slowdown in the US and China, nominal GDP growth in Europe is expected to remain resilient at 3%, matching last year’s performance.
UBS’s review of earnings momentum for the index indicates low momentum but notes a divergence in the margin outlook across sectors. While consensus expectations have stabilized at a growth of 6-7% by 2025, UBS is less optimistic, forecasting a 5% decline.
The consensus also anticipates a modest sales acceleration in the second quarter, leading to margin expansion in the latter half of the year, in contrast to UBS’s projection of margin contraction. The firm points out that earnings revisions have been evenly split between upgrades and downgrades across sectors. However, lower interest rates and gas prices could bolster earnings expectations for the consumer sector.
In terms of valuation, UBS observes that the SXXP’s valuations have increased to 14.1 times earnings, which is ahead of the bond discount rate, indicating growth optimism. The firm sees value in consumer sectors, anticipating a stronger recovery when energy prices and interest rates decline further.
While banks display a high price/earnings to growth (PEG) ratio, they also have low valuations and high distributions, despite consensus forecasts of negative earnings per share (EPS) growth amid falling interest rates.
Lastly, UBS comments on market sentiment, noting that while the index has caught up to macro factor implied levels, continued positive macro momentum will be necessary to sustain absolute index performance.
Healthcare and technology sectors are currently crowded, whereas sectors sensitive to lower yields, such as telecoms, real estate, and consumer cyclicals, are the most underweight. UBS suggests that these sectors could perform better if bond yields fall. The research firm’s targets for US and EU indices are currently under review, taking into account these observations.
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