UBS pushed back this week against market pricing that implies a higher probability of Federal Reserve rate hikes, arguing that moves in U.S. Treasury yields do not necessarily justify a more hawkish stance. The bank cautioned investors to weigh resilient corporate fundamentals rather than capitulating to recent market volatility.
Inflation and Fed timing
In a research note released on Thursday, UBS said that core inflation has been slower to fall than anticipated, leading the bank to postpone its expectation for the resumption of Fed easing to the December meeting, with a subsequent additional rate cut penciled in for March 2027. Despite that delay, UBS did not embrace the stronger hawkishness now reflected in market prices.
"We believe there is a high bar for Fed rate hikes, despite more hawkish recent market pricing," the bank said, citing trend wage growth below 3.5% and anchored inflation expectations as reasons investors should avoid overreacting.
Market moves and drivers
On Thursday, 10-year U.S. Treasury yields initially rose five basis points to 4.53%, while two-year yields climbed four basis points to 4.07%. UBS linked the renewed increase in yields to inflation concerns tied to tensions in the Middle East and higher energy prices. The bank advised that the move in yields should not be read as a trigger to abandon exposure to risk assets.
Instead, UBS recommended remaining disciplined on duration and in portfolio construction, suggesting that the recent yield uptick is a signal to manage interest-rate sensitivity rather than to exit equity allocations wholesale.
Equity outlook and corporate fundamentals
UBS kept a constructive stance on equities. The bank forecasted 20% earnings-per-share growth for the S&P 500 this year, citing a strong first-quarter earnings season in which underlying profits rose 19% - the fastest pace in four years - and roughly 80% of companies beat both sales and earnings estimates. UBS also retains a year-end S&P 500 target of 7,900.
The note framed these corporate results and beats as justification for continued exposure to equities, even as markets price in greater Fed hawkishness than UBS expects.
Summary conclusion
UBS believes recent Treasury yield movements have overstated the probability of more aggressive Fed action. The bank urges investors to focus on underlying corporate strength and to manage duration and portfolio construction in response to higher yields, while it delays its forecast for Fed easing to December and then March 2027 for an additional cut.