In US equities, CIO keep their Attractive view on financials, which should benefit from lower funding costs, cooling regulatory pressures, and a pickup in capital market activity. (UBS)
While we expect stocks to continue to climb next year, there will likely be bouts of volatility as markets digest the incoming administration’s policy priorities and what they mean for growth, rates, and inflation. Overall, the US economy should still be supported by rising real wages, lower interest rates, and lower inflation.
Given our economic outlook, we believe risk assets, and equities in particular, will be supported in the months ahead. We maintain our Attractive outlook for global equities and US equities in particular. Our December 2025 target of 6,600 implies about 10% upside through next year and reflects our belief that there is more to go in equities. In the US, we see the largest growth drivers tied to innovations in artificial intelligence (AI). Outside the US, there are attractive opportunities in emerging markets— specifically in Taiwan and India—as well as attractive valuations among European mid- and small-cap names.
In US equities, we keep our Attractive view on financials, which should benefit from lower funding costs, cooling regulatory pressures, and a pickup in capital market activity. The communication services sector is Attractive due to its solid digital advertising trends and investor enthusiasm around AI, while consumer discretionary should benefit from rate cuts. We also like utilities, as they are defensive and should do well in the event of weaker activity.
Additionally, we maintain our positive outlook on US technology, even as the sector has grown significantly over the past year. Specifically, we are recommending investors seize the AI opportunity as we expect AI to be a key driver of equity market returns over the coming years. Given such, it is important that investors hold sufficient long-term exposure to the theme. We currently see the best opportunities in the enabling layer of the value chain, which is benefitting from significant investments. We also like vertically integrated megacaps, which are well positioned across the value chain.
The confluence of rising electricity demand due to growing use of AI, electric vehicles and industrial electrification means there are attractive opportunities to invest in power and resources. We see opportunities across the electricification value chain, from rising data center usage from AI, to technological innovations in grid modernization, and also rising demand for transition metals like copper and aluminum.
With the Fed having made its first cut and central banks around the world undertaking rate-cutting cycles, we recommend investors position for lower rates. As cash and money market funds begin offering lower returns as rates fall, investors need to manage their liquidity more actively. We particularly like high-quality bonds that still offer relatively attractive yields and can perform well in the risk scenario of growth slowing rapidly. Specifically, we see good value in investment grade corporate bonds, Agency MBS, municipals, and sustainable bonds.
Looking beyond public markets, we continue to advise investors to diversify with alternatives as private managers that can provide debt or equity capital at different company lifecycle stages will have a key role to play. With most firms in the US now privately held, accessing private markets is essential to improve diversification and enhance risk-adjusted returns.
For more, see the full report, Yield & Income, 5 December 2024.
