UBS says US equity market is too upbeat on the Fed achieving a soft landing for economy

Via a note from UBS Wealth Management on the S&P500, noting the stalling rally this week after a strong YTD.

In brief from the note:

  • the market is too upbeat about the prospect that the Fed can achieve a soft landing for the US economy
  • Risks remain that the Fed could hike more than markets are expecting.
  • The delayed effects of prior hikes are still feeding through, adding to headwinds for the economy.
    • nominal yield on the 10-year Treasury … rose … to … the highest level since the collapse of Silicon Valley Bank in early March.
  • Equity market valuations leave little room for policy error.

    • The US equity market is trading at 19.3 times 12-month projected earnings, a roughly 19% premium to the 15-year average …Such multiples have historically been associated with periods in which 10-year US Treasury yields have been below 2%, rather than close to 4% as at present, and also periods of robust earnings growth. Given that 12-month trailing earnings per share growth has remained above the post-1960 trend rate, we see little potential for a swift bounce—even if the Fed succeeds in guiding the US economy to a soft landing.

UBS conclude:

  • So, against this backdrop, we see a better risk-reward outlook for fixed income over equities.

This article was written by Eamonn Sheridan at Source