UBS, in a client note circulated on Monday, advised investors to take advantage of current equity strength to rebalance portfolios, citing elevated concentration in a handful of U.S. technology leaders that could leave many holdings exposed if market leadership shifts.
The S&P 500 reached a fresh record high on Friday and has risen more than 10% year-to-date, UBS noted, a rally that was aided by reports the U.S. and Iran were nearing a framework agreement to reopen the Strait of Hormuz. The MSCI All Country World index has advanced 10.9% for the year.
Despite the constructive backdrop, UBS reiterated a year-end S&P 500 target of 7,900, saying the outlook is underpinned primarily by an assumed 20% increase in earnings per share. The bank cautioned, however, that subsequent gains are likely to display different characteristics from the recent rally.
"We expect the next phase of market gains to be marked by broader leadership beyond mega-caps, increased rotation and more frequent bouts of volatility as capital is reallocated," UBS wrote. To that end, the bank encouraged diversification across regions and sectors.
UBS specifically recommended increasing exposure to Japan, China, emerging markets, Switzerland, global health care and European consumer discretionary. The note also highlighted that the influence of artificial intelligence is spreading into infrastructure, power and industrial supply chains - areas beyond the handful of companies that have driven recent market strength.
On fixed income, UBS said the recent bond sell-off has created an opportunity to lock in attractive yields and flagged high-quality government bonds with short- to medium-term maturities as particularly appealing. The bank added that market pricing for central bank policy appears to have moved too far in a hawkish direction for most major economies.
With respect to technology specifically, UBS warned that "it remains unclear which companies will emerge as leaders in monetizing AI," a point that could leave portfolios vulnerable to disappointment and heightened volatility even after a robust earnings season.
In sum, UBS advised using the current market strength to rebalance away from concentrated positions in mega-cap tech and toward a broader mix of geographies, sectors and shorter-duration high-quality bonds, while recognizing that the path forward may involve more rotation and volatility.