From a global lens, the boost in US stocks will likely be offset by relatively weaker European stock market performance. (UBS)
Looking ahead, a continuation of the 2017 tax cuts and lower corporate tax rates should stimulate economic growth and corporate profits. Financials should benefit from President-elect Donald Trump’s focus on deregulation, which should spur consolidation of smaller and mid-sized banks as well as an uptick in investment banking activity across sectors.
Meanwhile, AI momentum continues unabated—a bright spot during the US earnings season among sprinkles of cyclically weaker data points in smartphones and PCs. It’s unlikely that tech will lose its leadership of US equity markets and give way to a significant broadening of S&P index weights in the near future. While current concentration levels are nearing historical peaks, we see this concentration persisting or even increasing into the New Year; year-end seasonality typically favors a continuation of momentum instead of reversion.
Nonetheless, risks remain. The US is still set to ban exports of semi components to China, which was likely pushed out from the usual October cadence because of the election. The election outcome has led to higher interest rate expectations, which typically weighs on share prices, as investors now anticipate higher inflation in the long term; two-year breakevens ticked up 20bps after the election and could rise further depending on the size of fiscal expansion and tariffs. Moreover, volatility related to geopolitical events is unlikely to end with Trump back in power.
From a global lens, the boost in US stocks will likely be offset by relatively weaker European stock market performance. Europe’s local economies lack fiscal stimulus and structural innovation, and they may now be subject to further US tariffs.
One intriguing market outside the US is China. With Trump’s threat of 60% tariffs on Chinese imports hanging over the fate of the Chinese economy, President Xi’s only likely offset is domestic stimulus, the size of which has so far underwhelmed increasingly heightened expectations. The strong language from the October Politburo meeting suggests that Beijing is set to scale up the support. The government will likely carefully calibrate the fiscal stimulus in response to the severity of the US’s actions. With Trade Representative Robert Lighthizer’s reappointment, we remain on the sidelines on China until we see how its equities react amid the turmoil.
Main contributor: Ulrike Hoffmann-Burchardi
For much more on asset allocation and positioning, see the original report: UBS Equity Compass: Fog lifting, 21 November 2024.
