UBS: Fed Easing and AI Momentum Signal Market Inflection Point

The U.S. stock market's recent pullback may have reached a critical inflection point, with UBS Securities' trading desk signaling that the rotation out of equities is likely over, paving the way for a year-end rally. The S&P 500 and Nasdaq 100 indexes, which had fallen to their 100-day moving averages after a sharp selloff last week, are now showing signs of stabilization. Michael Romano, UBS' head of equity derivative hedge fund sales, argued in a note that "the derisking is behind us for now," citing abated selling pressure from systematic funds, renewed expectations for a Federal Reserve rate cut in December, and technical support at key levels according to Romano's analysis.

Romano projected the S&P 500 could climb toward 7,000 by year-end, up from its closing level of roughly 6,600 last week. This optimism is underpinned by strong earnings from AI leaders like Nvidia Corp. and political developments, including U.S. President Donald Trump's discussions on chip exports to China. The strategist also highlighted a shift in momentum stocks, which typically exhibit rapid price swings. A UBS long-short momentum basket, down 14% in November, may see a reversal in December-a departure from its usual seasonal weakness.

The Fed's dovish pivot has further bolstered market sentiment. New York Fed President John Williams' comments on Friday, suggesting room for rate cuts, reignited bets on monetary easing. Traders now price a roughly 60% chance of a 25-basis-point cut in December, according to Fed fund futures. UBS' rate-sensitive basket surged 4.6% on Friday, the most since August, reflecting the market's pivot toward optimism according to UBS analysis.

UBS also emphasized broader fundamentals supporting the equity rally. The firm noted that Fed officials have signaled flexibility to cut rates further in early 2026, driven by a softening labor market and stable inflation expectations. Meanwhile, AI monetization is gaining traction, with cloud platforms reporting accelerated revenue growth and price hikes for AI services. UBS expects earnings strength across the S&P 500, forecasting 11% growth in 2025 and 10% in 2026.

Global markets have mirrored this optimism. The G20 summit in Johannesburg, despite the U.S. boycott, produced a declaration on inequality and climate action, reinforcing multilateral cooperation. Asian and European equities rallied, with the MSCI Asia-Pacific index up 1%, while U.S. benchmarks like the S&P 500 and Nasdaq rebounded sharply on Monday according to Reuters reporting.

However, challenges persist. The AI-driven rally has raised concerns about a potential bubble, with Gartner estimating $1.5 trillion in global AI infrastructure spending by year-end. Skeptics question whether returns will justify the investment, particularly as tech giants increasingly fund expansions through debt rather than cash flow according to Seeking Alpha analysis.

UBS' outlook hinges on a delicate balance between macroeconomic signals and sector-specific momentum. "December momentum seasonal is being pulled forward to November, possibly making December a good month to be long momentum," Romano wrote, underscoring the firm's bullish stance on a market reset according to Bloomberg reporting.