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Investing.com -- The U.S. equity market is showing signs of fragility but there are no structural risks, according to UBS strategists.
Despite elevated valuations and some areas of earnings weakness, the bank believes underlying support from structural buyers like retirement accounts and corporate buybacks remains intact.
“The remarkable resilience of U.S. equity markets persists,” a team led by Gerry Fowler wrote, attributing the strength to “significant structural buying that is price-insensitive and more powerful than tactical/price-sensitive sellers.”
The S&P 500 trades above 22 times forward earnings, and the strategists note that this would typically be concerning during a period of earnings downgrades. However, such revisions have stabilized, and flows from pensions and buybacks continue to buoy markets.
UBS points out that earnings downgrades are concentrated in consumer-facing sectors such as autos and durables, both hit hard by tariffs. More broadly, “if hard data were to weaken more significantly,” the firm says, “balanced funds selling equities to buy bonds could create a forceful enough flow to see U.S. equities lower.”
In terms of positioning, UBS sees investors reducing underweights and rotating out of autos and into banks, which benefit from deregulation. Utilities and consumer staples continue to attract positive sentiment, while crowding remains elevated in AI-linked areas, particularly semiconductors.
The macro environment, meanwhile, remains in a sputtering expansion phase, supported by slightly improving OECD indicators and buoyant sector PMIs.
Against this backdrop, the strategists recommend shifting away from chasing the rally and instead favoring growth defensives like communication services and utilities, along with thematic cyclicals such as AI, financials, and industrials.
Top-rated names include Broadcom (NASDAQ:AVGO), Intercontinental Exchange Inc (NYSE:ICE), Oracle (NYSE:ORCL), and Meta (NASDAQ:META), while consumer sectors—especially personal products, durables, and autos—remain weak.
JetBlue Airways Corp (NASDAQ:JBLU), Lennar (NYSE:LEN), and Dow Inc (NYSE:DOW) rank among the least attractive stocks.
In sum, while risks tied to data deterioration and stretched valuations exist, UBS maintains that current market structures “continue to limit U.S. equity downside unless something seismic happens to upset these trends.”