UBS’s framing suggests markets may be underpricing the durability of the current earnings cycle relative to the geopolitical noise around Hormuz, given the bank’s emphasis on broad-based profit beats across the US, Europe and Asia. The view that Fed rates stay unchanged for the rest of the year, despite Warsh’s guarded comments last week, could support risk appetite if disinflation data comes through as UBS expects, since that would allow markets to scale back any residual hike pricing. On commodities, the bank’s read that energy flows through Hormuz normalise only gradually implies continued support for Brent even without a return to wartime highs, while the case for industrial metals, agricultural commodities and gold points to a broader diversification argument beyond just the energy trade.
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UBS says robust earnings and cooling inflation should keep global markets on a constructive footing even as the Strait of Hormuz reopens only gradually.
Summary:
- UBS says investor sentiment improved at the start of August after Trump said talks with Iran would take place, having earlier called off an imminent attack in hopes of reopening the Strait of Hormuz.
- The bank’s base case is that energy flows through the Strait recover gradually over time, rather than quickly, supporting continued upside in equities alongside robust earnings growth.
- UBS expects moderating inflation to allow the Federal Reserve to hold interest rates unchanged for the rest of the year, even after Fed Chair Kevin Warsh declined to detail his policy approach last week.
- The bank sees upside risk to its 20% S&P 500 earnings growth estimate for the year, cites the strongest European corporate performance in over three years, and expects Asian profits to rise 72% this year.
- UBS says oil may stay below its wartime high but a slower-than-expected normalisation of supply should keep Brent supported, while also backing broad commodity exposure across energy, industrial metals, agricultural commodities and gold.
- The bank notes weaker gold investment and jewellery demand in the second quarter per the World Gold Council, but says central bank and over-the-counter purchases remained strong.
UBS has maintained a broadly constructive outlook for global markets, arguing that strong corporate earnings and moderating inflation should outweigh lingering geopolitical uncertainty over the Strait of Hormuz for the remainder of the year.
The bank said investor sentiment had improved at the start of August after President Trump indicated that talks with Iran would take place, having earlier called off an imminent attack in the hope of reaching a deal to reopen the Strait. UBS noted that megacap technology earnings released last week reinforced the positive backdrop, with cloud revenue growth accelerating further and hyperscaler capital spending remaining strong in the near term. While the bank said it remains unclear how quickly an agreement might be reached and the waterway reopened, its base case is that energy flows through the Strait should recover gradually rather than swiftly.
That gradual normalisation view underpins much of UBS’s broader market thesis. The bank expects robust earnings growth to drive further upside in global equities, while moderating inflation should allow the Federal Reserve to keep rates unchanged through the rest of the year. On oil, UBS said prices may remain below their wartime highs, but a slower-than-expected recovery in energy supply should keep Brent crude supported, a dynamic it also sees as favourable for broader commodity exposure.
On equities specifically, UBS pointed to strong momentum in the ongoing US second-quarter earnings season, with both the breadth and scale of earnings beats coming in ahead of historical averages. The bank said it continues to see upside risk to its 20% earnings per share growth estimate for the S&P 500 this year, citing resilient consumer spending and improving cyclical strength as factors that should support a broadening rally beyond the largest names. In Europe, UBS said companies are delivering their strongest performance in more than three years, with earnings estimates for the Stoxx Europe 600 continuing to be revised higher, a trend the bank said reinforces its view that investors should hold diversified equity exposure to participate fully in market gains. In Asia, UBS expects corporate profits to rise 72% this year.
On monetary policy, UBS acknowledged that Fed Chair Kevin Warsh’s refusal last week to detail his policy reaction function or strategy for tackling inflation had pushed inflation expectations higher. Even so, the bank said it continues to expect data over the coming months to show further disinflation as tariff effects fade, which it believes should allow markets to scale back expectations for further Fed rate hikes. UBS noted that current high starting bond yields provide a material cushion against any further increase in rates.
On the geopolitical front, UBS said the path toward a swift normalisation of energy flows through Hormuz has proven more difficult than initially hoped, reinforcing the case for maintaining portfolio exposure to energy. The bank also pointed to broader reasons for diversified commodity exposure, citing artificial intelligence infrastructure build-out and electrification trends as long-term supports for industrial metals, and a high probability that the current El Niño episode develops into a very strong or super El Niño by year-end, which it said supports return potential in agricultural commodities. On gold, UBS said the metal remains a useful strategic diversifier, noting that while the latest World Gold Council report showed weaker investment and jewellery demand in the second quarter, central bank and over-the-counter purchases remained strong.
UBS concluded that while geopolitical risks could keep volatility elevated in the near term, the combination of strong corporate earnings, moderating inflation and resilient demand should provide a constructive backdrop for global markets through the remainder of the year.
This article was written by Eamonn Sheridan at investinglive.com.
