UBS's Bullish Outlook on U.S. Markets Amid Trade Uncertainties: A Contrarian's Playbook

Amid the cacophony of trade disputes and geopolitical tensions, UBS CEO Sergio Ermotti has struck a defiantly optimistic chord. In recent remarks, he acknowledged the "unpredictable" economic path ahead but argued that the U.S. market's underlying resilience—driven by structural trends like AI innovation and labor market strength—offers fertile ground for contrarian investors. His message is clear: fear of tariffs and trade wars has created mispricings in key sectors, and the rewards for investors who navigate these uncertainties with patience and precision could be substantial.

The Contrarian Case for U.S. Equities: When Fears Overshadow Fundamentals

UBS's analysis reveals a stark disconnect between short-term volatility and long-term fundamentals. While trade uncertainties have spooked investors, sectors like technology, industrials, and materials are trading at discounts that fail to account for their enduring strengths. For contrarians, this is a rare opportunity to buy quality assets at bargain prices—provided they can stomach near-term turbulence.

1. Technology & AI: The Engine of Resilience

The so-called "Magnificent 7" tech giants—Apple, Microsoft, Amazon, Alphabet, and others—have been the bedrock of recent equity gains. These companies, which account for nearly 30% of the S&P 500's total returns year-to-date, are leveraging AI-driven efficiencies to maintain margins and innovation pipelines. UBS notes that their dominance is structural, not cyclical: AI adoption is accelerating across industries, and these firms are the gatekeepers to this revolution.

Investors should consider overweighting these names, but the real contrarian opportunity lies in sectors that have been unfairly punished by trade fears.

2. Industrials: Mispriced Strength in Manufacturing

Trade tariffs on steel and aluminum have spooked investors, but UBS argues that industrials like Caterpillar (CAT) and Deere (DE) are being sold off irrationally. Both companies boast robust backlogs and exposure to global markets—Caterpillar's 60% international sales mix insulates it from U.S. policy whiplash—yet their stocks have underperformed the S&P 500 by 8% and 9%, respectively, in 2025.

The undervaluation is even more striking when considering Deere's record agricultural demand in emerging markets. For contrarians, this is a "buy the dip" scenario: place long positions in CAT and DE with stop-losses 15% below entry points. These stocks could rebound sharply if trade negotiations stabilize or infrastructure spending accelerates.

3. Materials: A Discounted Hedge Against Recovery

The materials sector, led by Freeport-McMoRan (FCX) and Linde (LIN), offers another contrarian play. Despite fears of prolonged trade conflicts, these companies are trading at discounts to their 2024 highs—20% in FCX's case—while maintaining strong fundamentals. FCX's 4% dividend yield and exposure to copper demand (a key indicator of global growth) position it as a low-risk bet on an eventual cyclical rebound.

UBS recommends overweighting the sector via ETFs like the S&P Materials Sector Fund (XLB), using limit orders 5% below current prices to capitalize on dips.

Navigating the Macro Risks: Fed Policy and Labor Markets

While UBS sees the bull market intact, investors must remain vigilant to macro risks. The Federal Reserve's reluctance to cut rates—despite trade tensions—stems from a resilient labor market (June's 147,000 jobs added and 4.1% unemployment rate) that defies recessionary fears. UBS expects a year-end rate cut, which could further buoy equities. However, prolonged trade disputes or a sharp Fed overreach (e.g., an abrupt rate hike) could pressure cyclical sectors.

To mitigate these risks, prioritize firms with global diversification (e.g., 3M, with 60% of sales outside the U.S.) and avoid overexposure to sectors tied to domestic consumption.

Conclusion: Timing Is Everything in This Volatile Dance

UBS's outlook hinges on a critical premise: trade disputes will resolve incrementally, not catastrophically. The current market turmoil is pricing in worst-case scenarios, creating a "buying window" for investors with a 12–18-month horizon. Tech's AI tailwinds, industrials' global resilience, and materials' undervalued fundamentals form a contrarian trifecta.

Actionable Strategy:
- Long-term allocations: 20% in the "Magnificent 7," 30% in industrials (CAT, DE), and 20% in materials (XLB).
- Hedging: Use SPDR S&P Aerospace & Defense ETF (XAR) to short volatility, capitalizing on stabilization in defense and aerospace.
- Wait for clarity: Avoid aggressive bets until the September Fed meeting and Q3 earnings season provide clearer signals on trade and growth.

In the words of Ermotti: "The path forward is unpredictable, but the destination is still growth." For contrarians, the path to outperformance lies in embracing that uncertainty—and betting on the companies that can thrive despite it.