UBS raises global earnings forecast to 20% as equities hit fresh highs despite Middle East conflict

• Half the earnings upgrade stems from technology sectors benefiting from compute shortages and memory bottlenecks, with AI-related capital spending expected to grow nearly 70% this year and 20% next year
• Energy sector accounts for 25% of the upgrade due to rising oil and gas prices from Strait of Hormuz disruptions caused by the Iran conflict
• UBS warns of three key risks: timing of Strait of Hormuz reopening, potential inflation and bond yield increases undermining valuations, and intensifying tech sector competition; sees downside target of 935 if Middle East conflict escalates

Summary

UBS has significantly upgraded its global equities earnings growth forecast for 2026 from 12% to 20%, citing strong earnings season results and resilient economic fundamentals. The Swiss bank maintained its "attractive" rating on the MSCI All Country World Index, setting a December 2026 target of 1,410 (rising to 1,470 by June 2027) from current levels of 1,310.

Key Drivers:

• Technology sector accounts for roughly half the earnings upgrade, driven by compute shortages, memory bottlenecks, cloud computing strength, and digital advertising growth
• AI-related capital expenditure expected to surge nearly 70% this year, followed by 20% growth next year
• Energy sector contributes a quarter of the upgrade due to rising oil and gas prices from disruptions in the Strait of Hormuz linked to the US-Iran conflict
• Remaining quarter spread across other robust-performing sectors

Market Context:

Global equities declined in March following the Iran conflict but rebounded sharply in April-May, reaching fresh all-time highs despite ongoing Middle East tensions.

Investment Strategy:

UBS recommends well-diversified exposure across regions, favoring the US, Japan, emerging markets, and Switzerland. Within AI, the bank is adopting a selective approach, looking beyond US large-cap tech toward Chinese technology companies. Preferred sectors include consumer discretionary, industrials, healthcare, US financials and utilities, and European real estate.

Key Risks:

• Timing of Strait of Hormuz reopening
• Rising inflation and bond yields threatening valuations
• Intensifying technology sector competition
• Narrow recovery breadth creating record concentration risk

Downside scenario: MSCI ACWI could fall to 935 by December if conflict escalates, energy disruptions persist, or inflation forces rate hikes.