UBS Sees U.S. Stock Market Reversing Recession Fears, Alpha Opportunities Rising

UBS has indicated that the U.S. stock market is likely to continue its current trend, with alpha opportunities heating up. According to UBS's model, following the tariff announcement on April 2, the U.S. stock market quickly priced in a recession scenario, effectively ruling out the possibility of a "Goldilocks" economy, where growth is moderate. However, this trend has since reversed, and the probability of a Goldilocks scenario has returned to the average level seen in March.

UBS remains cautious about the state of U.S. consumers and is uncertain whether the market has adequately priced in the risks associated with the recent reversal of tariff policies. The model suggests that the non-essential consumer goods sector may face further downward pressure, while the communication services and utilities sectors are expected to perform relatively well.

The current economic environment is characterized by high uncertainty, with late-cycle features persisting. The Purchasing Managers' Index (PMI) has been declining, while the OECD leading indicator suggests that the economy is still in the expansion phase but showing late-cycle characteristics. The REVS regime favors late-cycle defensive sectors such as communication services, but as leading indicators weaken, the preference may shift towards utilities. The transition from uncertainty about policy announcements to uncertainty about policy outcomes is likely to cause market fragmentation, with significant differences in earnings growth and performance across different industries.

After a month of significant adjustments, the pace of changes in sales and earnings expectations across almost all sectors has slowed. The sectors with the largest downward revisions include automobiles, durable consumer goods, and building materials. The dispersion in earnings scores indicates the presence of alpha opportunities in the market.

U.S. stock market valuations remain higher than in other global regions, with dollar-denominated earnings still outperforming Europe by 10%, above the long-term trend. In the short term, market performance has been significantly below UBS's narrative radar model expectations, but this discrepancy is more likely due to unknown factors in the model, as the overall trend remains correlated.

UBS's crowding data, such as 13-F reports and industry-wide institutional broker data, show that the U.S. market continues to hold a net long position, although it is lower than the peak in March. The significant rotation from cyclical consumer stocks (durable goods and automobiles) to defensive sectors (such as essential consumer goods) has not yet fully returned to normal. Compared to the beginning of the year, the crowding in the technology hardware sector has significantly increased. The beta allocation of actively managed funds remains low.