CIO sees better risk-reward in high-quality bonds than in broad US equity indexes. (UBS)

We see better risk-reward in high-quality bonds. Within equities, we recommend diversifying beyond the US and growth stocks in favor of emerging markets. We also favor more defensive equity sectors like consumer staples and utilities.


Equities have rebounded since their March low.

  • The S&P 500 is 11% higher than the March low set in the wake of Silicon Valley Bank's collapse, as of 2 June.
  • The S&P 500 is trading at around 18.2x forward price-earnings, higher than pre-pandemic levels.
  • The VIX index of implied US equity volatility stood at 14.6 on 2 June, compared with a long-term average of around 20.

But we think the risk-reward outlook for broad US equity indexes is unfavorable.

  • Credit conditions are likely to tighten further and slow US economic growth.
  • Historically, when the S&P 500 traded above 18x, consensus earnings growth expectations were robust (14% on average) or the 10-year US Treasury yield was less than 2%.
  • We expect S&P 500 earnings to contract 5% in 2023, and the 10 year Treasury yield is currently around 3.72%.

So, we hold a least preferred view on equities.

  • We see better risk-reward in high-quality bonds than in broad US equity indexes.
  • Within equities, we recommend diversifying beyond the US and growth stocks. We also favor strategies to protect against the downside in the US.
  • Our preferred equity sectors include defensives like consumer staples and utilities, which should be relatively resilient as economic growth slows.

Did you know?

  • The market-cap-weighted S&P 500 delivered a total return of 9.6% in the first five months of the year. But its advance has been driven primarily by a handful of mega-cap growth stocks. The equal-weighted S&P 500, which dilutes the impact of mega-cap stocks, returned a negative 0.6%.
  • The outsize year-to-date rally in the NYSE FANG+ index (68%), which tracks the top 10 most traded tech companies, underscores how narrow the rally has been this year.
  • Historically, narrow leadership has been a hallmark of late-stage bull markets rather than the start of a more prolonged upswing.

Investment view

We hold a least preferred view on global equities. Within the asset class, we recommend diversifying beyond the US and growth stocks given elevated valuations and rising risks to the US economy. We also recommend strategies to protect against downside risks in the US. We see opportunities in emerging market equities, including China, and in select European themes, including consumer sectors. At a global sector level, we like consumer staples, utilities, and industrials.


Main contributors - Vincent Heaney, Alison Parums


Content is a product of the Chief Investment Office (CIO).


Original report - Is the equity rally sustainable?, 5 June 2023.