Investing.com -- UBS analysts argued in a note Thursday that concerns over a U.S. recession are overstated, despite rising trade tensions and recent market volatility.
"US recession fears look overdone," wrote the bank.
“Worries over global trade tensions overshadowed reassuring signs of slowing inflation,” they said, noting that the S&P 500 struggled to rally after February’s Consumer Price Index (CPI) report, despite inflation cooling.
The data showed core inflation at 3.1%, the slowest pace since September 2021.
“Inflation came in below the consensus forecast on a headline and core basis, as well as an annual and monthly basis,” UBS stated.
However, investor sentiment remains cautious due to newly imposed U.S. tariffs on steel and aluminum, which triggered retaliation from Canada and the EU.
UBS acknowledged concerns that “higher tariffs are taking a toll on business confidence” as reflected in the NFIB survey of small businesses, where optimism has faded since Trump’s election.
However, the bank argues that fears of recession or stagflation are overblown “unless the global trade conflicts escalate more than we expect.”
The Atlanta Fed’s GDPNow model, which recently projected a 2.4% contraction for Q1, has also contributed to market pessimism.
However, UBS believes this is distorted by a surge in gold imports, which exaggerated the trade deficit’s drag on GDP.
“GDPNow would be 2 percentage points higher if the gold effect were stripped out,” they explained.
Additionally, UBS sees a resilient labor market supporting consumer spending. “February’s jobs report highlighted solid payroll growth, historically low unemployment and rising wages,” while job openings increased to 7.74 million. They also expect slowing inflation to allow for Fed rate cuts later this year.
Despite volatility from policy uncertainty, UBS remains bullish. “Robust economic growth and AI tailwinds should support equities, with the S&P 500 expected to reach 6,600 by year-end.”