UBS Sees 20% Upside in AI, Defense, Banking Sectors

UBS Group AG, a leading Swiss financial services company, has expressed a bullish stance on certain sectors within the U.S. stock market, suggesting that these areas still hold potential for upward valuation. The firm's analysis indicates that while the overall valuation of the U.S. stock market has reflected its fundamental factors, it has not reached an excessively high level. This leaves room for individual stocks to be revalued upward.

UBS highlights three sectors in particular: artificial intelligence (AI), defense, and banking. The firm's optimism is based on the observation that the valuation of the "Magnificent Seven" stocks has already declined, and the current market valuation is primarily driven by the "terrific 20" stocks, which are the next most favored 20 stocks after the "Magnificent Seven." Despite this, many industries, including banking, are not overvalued.

Looking ahead to the second half of the year, UBS emphasizes the importance of microeconomic factors over macroeconomic ones. The firm advises that stock selection should be based on industry trends and investment themes. In the Asian market, UBS recommends focusing on sectors such as robotics, electric vehicles, and emerging consumer markets. Other opportunities in Asia include the technology supply chains in Japan and South Korea, with expectations that Japanese stocks will follow the positive trend of South Korean stocks in the second half of the year.

Regarding AI investment opportunities, UBS notes that companies dedicated to AI innovation are heavily reliant on the United States and China. While the U.S. excels in research and development from the ground up, Chinese companies are superior in applying technology. UBS also points out that AI-related stocks are not limited to the technology sector; for instance, small nuclear power companies could present opportunities if AI causes bottlenecks in the U.S. power supply.

UBS also notes that some funds have returned to the risk market after previously exiting due to trade tensions. Institutional investors are leading this return, while retail investors are still cautious. As the U.S. reduces interest rates, lowering the returns on savings accounts and money market funds, more capital is expected to flow back into the risk market in search of higher returns.