The US economy has shown signs of moderation in labor markets and inflation data over the past few months, coupled with a normalization in consumer spending.
Despite this, growth data has surprised on the upside, with a 2.8% annualized Q2 real GDP figure surpassing expectations. This has prompted policymakers to signal imminent rate cuts, which UBS strategists expect to start in September. The cuts are anticipated to provide relief to interest-rate-sensitive sectors such as mortgage rates and capital-raising activities.
UBS strategists expect the economy to cool in the coming quarters, with growth trending closer to 2% and inflation moderating towards the Federal Reserve’s 2% target.
"Looking ahead, the odds of a 'Roaring ‘20s' scenario, a bull case environment with growth, inflation, and interest rates akin to the mid-to late-1990s, have risen,” UBS strategists noted.
The first half of 2024 saw strong equity market performance, particularly in the tech sector, which posted double-digit quarterly gains. However, starting in July, a rotation occurred with previous winners like tech underperforming, while laggards like small caps surged.
Strategists pointed out that the markets have “gotten ahead of themselves” by pricing in about 65bps of rate cuts in 2024 and over 100bps next year. They caution that these high expectations, if disappointed, “may be enough to halt if not reverse the recent rotation trade.”
On the politics front, a Trump victory remains the base case for markets, with UBS assigning a 40% probability to a "Red Sweep" and a 15% chance to a "Red Divided Government." The recent shift in the Democratic nominee to Vice President Kamala Harris has slightly increased the odds of a Democratic victory, with a "Blue Sweep" scenario at 10% and a "Blue Divided Government" scenario at 35%.
“The impact of the Trump trade, and the higher likelihood of reflationary policies, on the recent market rotation is hard to isolate and may be even more so in light of President Biden ending his campaign,” strategists commented.
Meanwhile, UBS said the dealmaking is expected to accelerate following anticipated rate cuts and election clarity.
Private equity (PE) dealmaking is at 2018 levels, but available capital, or "dry powder," is 1.5 times higher, with holding periods now over six years.
Sectors like logistics, infrastructure, energy, and life sciences show promise. While IPO and VC markets are improving, they lag behind M&A and PE. VC fundraising remains low, strategists highlighted, but valuations for start-ups are stable, with companies extending funding runways and using new financing structures.