UBS sees two Fed hikes in 2026: what should investors buy

• August employment gained 162,000 jobs versus 55,000 expected, with unemployment holding at 4.1%, marking the strongest monthly increase since March
• UBS recommends AI and power equities (QQQ, XLU) and medium-to-longer duration bonds, noting investment implications depend on whether hikes stem from growth strength or inflation concerns
• Gold faces near-term pressure from higher real rates and a stronger dollar, but UBS views it as a portfolio hedge against inflation and geopolitical risks rather than a tactical Fed play

Summary

Key Forecast:

UBS now expects the Federal Reserve to implement two 25-basis-point rate hikes in 2026—in September and December—reversing its prior forecast of no rate changes. This shift follows stronger-than-expected economic data and hawkish signals from Fed Chair Kevin Warsh.

Economic Data:

US employers added 162,000 jobs in August, significantly exceeding the 55,000 forecast, marking the strongest monthly gain since March. The unemployment rate held steady at 4.1%. Markets now price in a 60.4% probability of a September rate hike, according to CME's FedWatch tool.

Investment Implications:

*Equities:* UBS remains positive on global stocks despite potential short-term volatility from higher yields. The bank favors sectors linked to AI, power infrastructure, resources, and longevity themes. Recommended ETFs include Invesco QQQ (QQQ) and Utilities Select Sector SPDR (XLU).

*Bonds:* UBS no longer recommends short- to medium-duration bonds as cash alternatives. Instead, the bank sees opportunities in medium- to longer-duration bonds, which could benefit if tighter policy anchors inflation expectations or slows growth.

*Currency & Gold:* A hawkish Fed could strengthen the US dollar through increased capital flows. Gold faces near-term pressure from higher real rates but remains attractive as a portfolio hedge against inflation and geopolitical risks.

Key Risk:

Investment outcomes depend heavily on whether rate hikes respond to economic strength versus persistent inflation. Growth-driven tightening differs markedly from inflation-driven policy changes, with distinct implications for asset classes.

UBS emphasizes that broader economic conditions and inflation trajectories will matter more than individual Fed decisions.