House View Daily | Stocks should stay supported despite a potential pickup in volatility

This series by UBS is presented by automated voices and may include adaptive narration. Welcome to the CIO House View Day, bringing you the latest market developments and investment insights. I'm Christopher Swan from the UBS Chief Investment Office. It's Monday the 17th of August and the time is 7 a.m. in New York. Equity markets delivered a mixed performance. At the latest US Clothes, the S&P 500 fell 20 bips and the NASDAQ lost 10. In Europe, the stocks Europe 600 gained 20 basis points, while Switzerland's SMI was unchanged. In Asia, the Nikkei 225 rose 0.7%. In foreign exchange, the Euro buys 1.161 US dollars while the dollar buys 0.81 Swiss francs. The US 10 year Treasury yield stands at 4.67% down 2 basis points. Brent Crude is 10 bips lower at $88 a barrel, while gold is up 0.5% at $4404 an ounce. And that's all for the market update. Now let's take a more detailed look at the latest developments. Turning to today's thought of the day, the VIX index of implied US equity volatility fell to its lowest level this year on the market. Few major market catalysts are expected before late August, following the release of US retail sales data. Ahead of Nvidia's earnings and Federal Reserve Chair Kevin Worsh's Jackson whole speech, the path of least resistance for risk assets is likely higher. That said, market calm rarely lasts forever and risks remain, including persistent geopolitical uncertainty. Israel struck Lebanon over the weekend, with Prime Minister Benjamin Netanyahu saying the strikes were in retaliation for an earlier Hezbollah attack. The path toward reopening the state of Hormuz remains unclear, while attacks between Russia and Ukraine have intensified again. Even so, the foundation's supporting markets remain intact, in our view. Growth is holding up, earnings expectations are improving, and monetary policy may prove less restrictive than markets currently assume. The US economy continues to show resilience. While retail sales fell in July for the first time in nine months, recording their biggest drop since May last year, overall economic activity remains solid, despite the sharp rise in oil prices. Credit card data in recent weeks haven't shown much of a slow down in spending. At the same time, spending growth among lower income households is catching up with that of higher income consumers. Other recent data also point to resilience, with expanding factory activity suggesting an improving cyclical backdrop, corporate earnings have delivered the biggest positive surprise. Earnings growth expectations have risen sharply since the start of the year, reflecting stronger than anticipated profitability across corporate America. While earnings growth is unlikely to maintain its current pace indefinitely, revisions remain positive, and corporate fundamentals are generally supportive. AI investment remains robust amid encouraging monetization, while strong earnings growth across sectors suggests broader participation in the equity market. The policy backdrop may also become more supportive. Markets continue to price in more than one Fed hike over the next year, but the recent run of US economic data has weakened the near-term case for rate hikes. Payrolls fell, inflation moderated, and retail sales dropped. We expect incoming data to show continued disinflation, allowing the Fed to remain on hold and market pricing to move in that direction. A clearer indication of an extended pause this year would likely provide another tailwind for risk assets. So while volatility may pick up in the weeks and months ahead, we maintain a constructive outlook for risk assets into year end. We continue to favour broadly diversified equity exposure across sectors and regions. Turning now to another development that caught our attention, Japan's economy grew at an annualised pace of 1.1% in the second quarter. That was below the consensus forecast of 2% according to new government data. Private consumption was broadly flat, while capital spending fell 1.2% weighing on domestic demand. Exports provided support, helped by demand for Japanese hybrid vehicles, and continued global investment in AI-related equipment. Japanese government bond yields moved a little higher and equities posted modest declines after the release, as investors assessed the implications for growth, inflation, and bank of Japan policy. In our view, while the GDP mis-highlights softer consumption and investment, growth remains above trend. We don't see this data materially altering the outlook for gradual bank of Japan tightening. Preliminary capital spending data could also be revised higher. We maintain an attractive view on Japanese equities, with semiconductor equipment companies and component makers particularly well positioned in the global AI supply chain. We also see scope for broader participation as markets look beyond geopolitical and energy inflation risks. This could support catch-up gains for financials, machinery, construction, and leisure sectors. Looking ahead to the 18th of August, the focus will be on UK unemployment for June, Germany's ZEW Economic Sentiment Index for August, and US Housing Starts for July. And that's it for today. I'm Christopher Swan from the UBS Chief Investment Office, and we look forward to bringing you the latest update tomorrow. This material has been prepared and published by the Global Wealth Management Business of UBS Switzerland AG, regulated by Finmar in Switzerland, its subsidiaries or affiliates collectively referred to as UBS. The investment views have been prepared in accordance with legal requirements designed to promote the independence of investment research. The investment material is for your information only and is not intended as an offer, or a solicitation of an offer to buy or sell any investment or other specific product. The analysis contained herein does not constitute a personal investment recommendation or taken to account the particular investment objectives, investment strategies, financial situation, and needs of any specific recipient. This material may not be reproduced or copy circulated without prior authority of UBS. Please visit www.ubs.com/cio-disclamer to read the full legal disclaimer applicable to this material.