US stocks fell on Wednesday after September inflation beat expectations, with the week overall closing lower, but UBS’s Chief Investment Office (UBS CIO) says the S&P 500 can withstand a Fed that keeps raising rates. The odds of an October hike rose to around 40% from about 20%. The Fed already raised rates in September.
Headline inflation rose 0.6% on the month, up from 0.4% in August, driven largely by a 9.1% rise in gasoline prices. Core inflation rose 0.3% against the 0.2% consensus, for a second month running, taking the annual core rate to 2.6% from 2.4%. Prices also rose for shelter, airfares, vehicles, apparel and technology-related goods.
In a note on Thursday, UBS CIO said it expects Fed hikes in December and March, then a hold until late 2027. It raised its end-December forecast for the 10-year Treasury yield to 4.9% from 4.6%. The yield closed Wednesday at 5.19%, yet UBS CIO does not expect this to undermine its positive outlook for US assets.
The reasoning is said to rest on growth. UBS CIO points to US GDP growth of close to 2.5% annualised in the first half, likely near 3% in the third quarter. September payrolls were 29,000, but the three-month average of 51,000 is broadly in line with the pace needed to keep unemployment stable. Jobless claims are at a 10-week low, and ISM manufacturing stood at 54.5, with new orders in expansion for nine straight months.
UBS CIO says this lets policymakers focus on inflation without high near-term recession risk, and supports income, spending and profits.
Markets price roughly 3.5 further hikes beyond September’s, while UBS CIO expects two. NY Fed’s John Williams said “no need for urgency”, though UBS CIO says October is a closer call. If the Fed waits and inflation stabilises, UBS CIO says yields could fall.
On earnings, UBS CIO forecasts 28% earnings-per-share growth for the S&P 500 in the third quarter, backed by AI demand, cyclical improvement and a resilient consumer. It expects AI capital spending to rise 84% this year to $900bn, with semiconductors about half of S&P 500 third-quarter earnings growth and industrials broadening the contribution.
UBS CIO also cites history: across 16 Fed hiking cycles since 1954, the S&P 500 gained an average 10.8% in the year after the first hike. Past performance is no guarantee of future returns.
UBS CIO stays positioned for equity gains, diversified, and sees value in fixed income. It favours cyclical and secular equities alongside quality fixed income.