U.S. stocks performing "high-wire act" with key summer catalysts ahead - UBS

Investing.com - U.S. stocks are performing a "high-wire act" as a recovery from a slide after President Donald Trump’s "Liberation Day" event faces a string of potential headwinds, according to analysts at UBS.

Wall Street has erased sharp losses logged after Trump unveiled his punishing "reciprocal" levies on a host of countries in early April, with shares even flirting with new all-time highs.

The rebound has been so pronounced that the benchmark S&P 500’s year-to-date performance, which had been in negative territory for months, is now up by 1.9%.

A range of factors have been underpinning the rebound, including Trump’s decision to delay the reciprocal tariffs for 90 days and recent trade negotiations between the U.S. and China.

In a note on Friday, the UBS analysts said traders are now "adjusting" to a recovery that many had not anticipated.

"To many, this is highly unexpected but our tactical dashboard has proven valuable in highlighting that the macro and positioning conditions became too stretched at the lows. That ’Early Warning Signal’ optimism has now faded to neutral as futures longs have rebuilt and risk-premia compression reaches its limits," the analysts wrote.

Yet several "seismic economic changes" could upend the upswing in stocks, the UBS analysts said. The reciprocal tariff pause is due to end in July with the Trump administration still racing to sign bespoke trade deals with individual nations, while Congress is debating a massive tax-and-spending bill that economists warn could further expand America’s ballooning debt pile.

Economic data, key corporate earnings, and raft of central bank decisions are also all due out before the end of August.

"As tactical upside drivers fade, the implications of seismic economic changes [...] leave the market performing a high-wire act over a catalyst-fuelled summer," the UBS analysts argued.

More recently, investors have also been on edge as the world waits to see if Trump will join Israel in its ongoing air war against Iran. The White House has said that Trump will make his decision within two weeks.

Against this backdrop, the analysts said their research suggests that investors should "[lean] toward growth defensive" stocks -- or names that exhibit strong growth potential in sectors that are less vulnerable to economic ructions -- through the summer.

"It is not yet time to be contrarian on tech/AI themes with the power and software stocks in particular seeing relative earnings revision strength that is sufficient to limit valuation and positioning concerns," the strategists said.

The "top ranked" stocks they highlighted included Broadcom (NASDAQ:AVGO), Qualys (NASDAQ:QLYS), Zscaler (NASDAQ:ZS) and Pure Storage (NYSE:PSTG). Lower ranked stocks included Polaris (NYSE:PII), American Eagle (NYSE:AEO), HP (NYSE:HPQ) and Deckers (NYSE:DECK).