UBS strategists are recalibrating their regional and sector weights after noting a widening divergence in market performance this year. Global equities have continued to climb, but UBS says the gains are increasingly concentrated in cyclical markets and sectors rather than among U.S. technology names.
In a research note, Fabian Deriaz, a strategist at UBS, and Ulrike Hoffmann-Burchardi, chief investment officer for the Americas and global head of equities at UBS, said their conviction in a cyclical recovery remains intact. They cite easing tariff pressures, anticipated Federal Reserve rate cuts, and more favourable fiscal policy as the underpinnings of that outlook.
At the same time, the bank has adjusted its stance on technology. UBS now downgrades US tech sectors to Neutral and sees more attractive opportunities in Chinese and European tech stocks, along with the AI application layer. The bank said: "Even if US megacaps continue to generate substantial profits, we still take a more neutral stance." It added: "We do expect gains but believe there are better opportunities in Chinese and European tech stocks as well as in the AI application layer."
UBS pointed to recent turbulence among U.S. technology shares and a broader shift in leadership across global equities as reasons for the change. Despite the moderation in tech exposure, the firm kept an Attractive rating on the asset class as a whole, noting signs that global growth is troughing.
UBS also highlighted structural tailwinds but urged greater selectivity when it comes to artificial intelligence. The bank noted concerns about the capital allocation patterns of large U.S. cloud and platform companies, observing that "US hyperscalers [are expected] to use almost all their free cash flow to finance capex," which in turn raises questions about future returns.
On earnings and valuations, UBS projects 12% earnings growth for the MSCI AC World Index this year and described current valuations as elevated but not unreasonable. That assessment accompanies a recommendation for broader diversification beyond U.S. technology exposure.
Specifically, UBS called out opportunities in emerging markets, Japan, and Europe, as well as areas such as global banks and industrials. Sector preferences included banks and industrials globally, with U.S. preferences for health care and utilities. The bank maintained that technology sectors still offer substantial upside potential in Europe and China.
Key takeaways:
- UBS downgraded US tech sectors to Neutral while keeping an Attractive view on global equities overall.
- The bank favors Chinese and European tech names and the AI application layer over U.S. tech.
- UBS recommends diversification into cyclical markets and sectors such as banks and industrials, and notes selective opportunities in health care and utilities in the U.S.
Risks and uncertainties:
- Continued volatility in U.S. technology shares could further alter leadership dynamics across global equities - this affects technology and broader market allocations.
- If US hyperscalers maintain heavy capex spending financed by free cash flow, investor returns could be pressured - relevant to large cloud and platform companies.
- Macroeconomic shifts, including changes to tariff pressures, Fed policy expectations, or fiscal measures, could influence the pace and composition of the cyclical recovery - impacting cyclical sectors and regions.