UBS Predicts 1.1% U.S. GDP Decline, 1% Interest Rate Cut

UBS has taken a rare and firm bearish stance, expressing pessimism towards the U.S. economy, the U.S. dollar, and U.S. stocks. The bank predicts that the U.S. GDP growth rate will sharply decelerate from 2.0% in the second quarter to 0.9% in the fourth quarter, significantly below market expectations. This forecast is supported by several factors, including the depletion of excess savings, a slowdown in immigration, and the fiscal drag from the Infrastructure Investment and Jobs Act in 2025. Additionally, UBS anticipates that interest rates will decrease by 1% by the end of the year, double the market's consensus of 50 basis points.

UBS maintains a long-term bearish outlook on the U.S. dollar, citing that the U.S. net investment position has reached -88% of GDP. This situation is seen as a necessary correction before the start of a new bull market for the dollar. Despite a recent rebound in July, UBS believes that the fundamental logic of a dollar bear market remains intact, despite potential risks such as tariff policies and AI technology adoption.

Regarding the stock market, UBS has set a target for the MSCI Global Index at 960 points by the end of the year and 1000 points by the end of 2026. However, the bank warns of significant downside risks in the near term. UBS's cautious stance on U.S. stocks is based on concerns about valuation and positioning, the concentration risk of technology stocks, and the underestimation of tariff risks. The bank's CTA model indicates that global stock exposure is near historical highs, and U.S. composite beta positioning data shows a neutral to slightly bullish stance. UBS estimates a 25% probability of an unrecognized bubble forming if the Federal Reserve cuts interest rates by 1% as expected by the end of the year.

UBS also highlights the concentration risk of technology stocks, noting that approximately 70% of earnings growth comes from generative AI. However, the bank warns that the capital expenditure of large-scale enterprises as a proportion of sales revenue is approaching the levels seen in the TMT sector in 2000. If UBS's analysts are correct, the growth in capital expenditure for large-scale enterprises is expected to slow from 60% to 16% by 2026, which could pose a challenge for technology stocks.

UBS believes that the market is underestimating the risks associated with tariffs, as evidenced by the performance of the UBS Tariff Losers Basket in the U.S. and Europe. The bank emphasizes that the U.S. accounts for only 16% of global trade, and many non-U.S. countries are reducing trade barriers among themselves. UBS's clients acknowledge the close relationship between the price-to-earnings ratio and the credit spread, but the current credit spread is at the lower end of the historical range.