US stocks set for further gains despite inflation concerns, says UBS

• First-quarter US corporate earnings grew 19% year-over-year with approximately 80% of companies beating sales and earnings estimates, while UBS forecasts 20% earnings-per-share growth for the full year
• April PCE inflation reached 3.8% headline and 3.2% core, both three-year highs, prompting UBS to push back Fed easing expectations to December 2026 followed by March 2027
• US government deficit is approaching 8% of GDP, with debt servicing costs projected to rise to nearly 19% of general government revenues by 2031, up from 14% in IMF projections, posing longer-term fiscal risks

Summary

Key Outlook: UBS maintains an "attractive" rating on US equities, projecting the S&P 500 to reach 7,900 by year-end from current levels of 7,560, representing a 4.5% gain. The bank cites strong corporate earnings and resilient economic activity as primary drivers.

Corporate Performance: First-quarter results demonstrated robust fundamentals, with underlying earnings growing 19%—the fastest pace in four years. Approximately 80% of companies exceeded sales and earnings estimates. UBS forecasts 20% earnings-per-share growth for the year.

Inflation Concerns: The April PCE report showed headline inflation at 3.8% and core inflation at 3.2%, both three-year highs. UBS has delayed its Federal Reserve rate cut expectations to December 2026, followed by another cut in March 2027, citing persistent pricing pressures from AI-related software.

Fiscal Risks: The US general government deficit is approaching 8% of GDP. UBS warns that net debt costs could reach nearly 19% of government revenues by 2031, compared to 14% in IMF projections, potentially creating a feedback loop of higher yields and borrowing costs.

Investment Strategy: Despite risks, UBS recommends maintaining equity exposure balanced with portfolio diversifiers like gold. The bank advises focusing fixed income investments on shorter maturities and flags concentration risks in US tech stocks requiring rebalancing.

Regional Opportunities: Asia ex-Japan presents attractive prospects, with MSCI Asia ex-Japan profits expected to rise 62% this year.

Fed Stance: UBS expects the Fed to remain patient, supported by trend wage growth below 3.5% and anchored inflation expectations.