UBS Group strategists are forecasting a challenging period ahead for global equities, which are currently trading near all-time highs.
The strategists express concerns about the sustainability of significant revenue gains in a slowing economic growth environment, noting this as a "very unusual" mismatch in a recent Monday note.
Their primary concern revolves around the prospect of earnings disappointments, largely due to a combination of rising wages and the delayed effects of higher interest rates. These factors could potentially threaten profit margins across various sectors.
The concern is that as economic growth stalls, the ability of companies to sustain high revenue growth becomes increasingly questionable, particularly in a context where operating costs are rising.
The MSCI World Index, which represents developed-market stocks and is heavily influenced by high-performing tech companies, is currently just below its all-time high. However, the UBS strategists' outlook suggests that this rally might face headwinds.
“We see a 35% chance of equities rising 15%+ on the back of Gen AI being perceived to boost US productivity growth to 2.5%, a Nifty 50 style bubble (which often accompanies technical change), or if US wage growth quickly fell to 3% (without a major rise in unemployment),” the strategists wrote.
Region-wise, analysts are least bullish on Europe.
“GEM is cheap, has improving relative economic momentum, is earlier into the easing cycle, and has catalysts of China easing, a weaker dollar and Fed cuts. We favour Japan (unhedged) – corporate change and a once-in-a-generation shift into real assets are not being reflected in valuations.”
“The UK is an abnormally cheap defensive market. Our least favoured region is Europe (greatest earnings risk). The US is not as defensive as normal, owing to valuation, slowdown in GDP and margin risks that are higher than for global markets.”