Fears of an impending U.S. recession “look overstated,” investment bank UBS stated in a note on Monday.
The report suggests that despite recent market volatility and growing concerns over a potential economic downturn, the fundamentals remain strong.
The note highlights the recent surge in market volatility, which has been driven by factors such as the unwinding of yen carry trades and mixed economic data.
Last week, markets were particularly jittery, with the S&P 500 experiencing its largest one-day decline since September 2022. However, UBS notes that the market rebounded later in the week as positive U.S. jobs data helped ease recession fears.
The bank’s strategists remain optimistic about the U.S. economic outlook, pointing to solid household finances as a key buffer against recession risks.
“We expect the Federal Reserve to cut rates by 100 basis points in the remainder of this year, double our prior forecast, as it seeks to protect the labor market. However, recession risks look overstated, in our view, given that household finances remain solid,” the note states.
UBS also points out that the recent market correction has made valuations in certain sectors more attractive, particularly in U.S. tech stocks. According to the report, the U.S. tech sector is now trading at more reasonable valuations, with the sector’s 12-month forward earnings multiple having declined from a peak of 32 times in July to 27.4 times.
While acknowledging the potential risks of “hard landing” for the U.S. economy, UBS believes investors should not overreact to short-term market volatility.
The bank’s base-case scenario is for the S&P 500 to end the year around 5,900 and reach 6,200 by mid-2025, compared to its current level of approximately 5,344.
“We believe quality growth is an appealing equity strategy and especially in periods of heightened volatility,” strategists wrote.