UBS expects stocks to rebound despite investor caution

Investing.com -- Monday saw US equities decline for the third consecutive trading session, marking the S&P 500’s longest losing streak of the year.

Shares of major Chinese companies listed in the US lagged behind the broader market amid concerns over the White House’s latest measures to restrict Chinese investments, although these stocks rebounded in Tuesday’s premarket trade.

Moreover, comments by President Donald Trump regarding tariffs on Canada and Mexico, along with the anticipation of NVIDIA (NASDAQ:NVDA)’s earnings report later in the week, have contributed to investor wariness.

But despite the current volatility and the potential impact of Trump’s proposed policies, UBS strategists believe that the markets will eventually shift their focus back to core fundamentals, which “should support the equity rally further.”

The strategists maintain an Attractive rating on the China internet sector, citing strong fundamentals and early successes in AI innovation.

President Xi Jinping’s recent involvement in a tech symposium and solid earnings reports reinforce UBS’s positive outlook on the sector, despite the short-term sentiment being affected by US-China tensions and the state of China’s economy.

“While ongoing US-China tensions and the health of China’s economy are likely to weigh on sentiment in the near term, we think China’s internet sector should outperform amid early signs of success in AI innovation,” strategists led by Solita Marcelli noted.

Regarding the tariff discussions, Trump reaffirmed on Monday that the additional 25% tariffs on Canada and Mexico are progressing as planned, set to commence from March 4. He also urged Mexican authorities to impose tariffs on Chinese imports.

However, a White House official indicated that the timeline for these tariffs might be less definitive.

In its base case scenario, UBS expects selective and targeted tariff measures, considering the potential harm aggressive tariffs could inflict on the US economy.

Investor attention is also on Nvidia’s forthcoming earnings report, which will offer insights into the demand for its AI chips, especially after the emergence of China’s DeepSeek.

Ahead of the print’s release, scheduled for Wednesday, UBS expects significant growth in AI-related investments and demand, projecting a 35% increase in capital expenditures from the top four US tech firms by 2025, amounting to $302 billion.

“With improving AI adoption trends boosting monetization, we expect mid-teens returns for global AI stocks this year using our market capitalization opportunity framework,” strategists said.

Concluding their analysis, UBS maintains their year-end target for the S&P 500 at 6,600 points and stresses the importance of portfolio diversification and hedging strategies to manage the expected volatility.

They suggest capital preservation strategies as a means to potentially limit losses and advise investors seeking long-term AI exposure to consider structured strategies or to capitalize on dips in quality AI stocks.