UBS: Volatility continues but growth momentum remains, US stocks still have room for sustained rise

According to the Zhitong Finance APP, UBS has released a report indicating that the growth momentum of the US stock market will continue, with room for further increases. Despite recent fluctuations, investors should not overlook the fundamentals that remain favorable for the US stock market while closely monitoring the next steps of the new government.

UBS expects that as the market reacts to the upcoming significant news from Trump, there will be fluctuations in the market. If the proposed tariffs are implemented, they will have a negative impact on the targeted regions. However, the bank also believes that with the continued growth momentum, there is still room for the US stock market to rise further.

US President Donald Trump stated on his first day in office that he intends to impose a 25% tariff on Canada and Mexico starting next month regarding fentanyl and immigration issues. The president mentioned on Tuesday that due to fentanyl flowing into the US from China, the US is considering imposing a 10% tariff on Chinese imports starting February 1. He added that given the region's trade surplus with the US of $350 billion, the EU "will be subject to tariffs."

In addition to tariffs, UBS stated that ongoing investments in artificial intelligence (AI) over the next few years will continue to drive economic growth. Besides the tariff plans targeting China and the EU, Trump also announced on Tuesday a private sector investment of up to $500 billion to fund AI infrastructure, led by a joint venture between OpenAI, SoftBank, and Oracle's (ORCL.US) Stargate. SoftBank's Masayoshi Son stated that the joint venture will "immediately" deploy $100 billion, and Oracle Chairman Larry Ellison mentioned that the first data center for the project is already under construction in Texas. UBS believes this event will be another positive catalyst for the AI growth story.

Furthermore, the bank stated that the current earnings season should set a positive tone for corporate profits. Several large tech companies are scheduled to release their fourth-quarter results next week, and their capital expenditures may be further revised upward. UBS also expects the gap between AI revenue and capital expenditures to narrow, which will drive a 25% profit growth for large tech companies in the fourth quarter of 2024. More broadly, supported by economic growth resilience, the S&P 500 index is expected to see profit growth of 7-9% in the three months ending in December. By 2025, a 9% profit growth will push the S&P 500 index to 6,600 points by the end of the year.

The US economy is expanding, while the Federal Reserve is easing monetary policy. Since the inflation data released last week was milder than expected, the yield on 10-year US Treasury bonds has fallen by more than 20 basis points. Under UBS's baseline scenario forecast, Trump's tariff measures should not prevent inflation from further slowing. Therefore, as the Federal Reserve is expected to lower the policy rate by another 50 basis points, the yield on 10-year US Treasury bonds is projected to drop to 4% this year. It is worth mentioning that historically, the Federal Reserve's interest rate cuts during non-recession periods have been beneficial for the stock market.

Thus, the bank stated that while closely monitoring the next steps of the new government, investors should not overlook the fundamentals that remain favorable for the US stock market. Without taking any single viewpoint, UBS continues to favor technology stocks, utility stocks, and financial stocks, and believes that utilizing structured strategies to cope with recent fluctuations is valuable