UBS Sees Stocks Rally Broadening Beyond U.S. Megacaps

UBS said in a note this week that investors should diversify their equity exposure as markets reach new highs, arguing that the next leg of the stock rally is unlikely to be driven by the same handful of large-cap technology names that have led gains in recent years.

U.S. equities hit a fresh record at the start of May, supported by strong corporate earnings, with around 80% of S&P 500 companies by market capitalization that have reported first-quarter results beating both sales and earnings-per-share estimates.

UBS noted that “the median EPS beat (at 5%) is better than the longer-term average since 2015, suggesting a broadening of profit growth.”

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Despite the positive earnings backdrop, the Swiss bank flagged geopolitical risks, which remain elevated. Brent crude was trading near $110 per barrel at the time of writing (now $114), with UBS noting that it represented more than 50% above its pre-conflict level, as tensions in the Strait of Hormuz kept energy markets on edge.

Against that backdrop, UBS believes “the next phase of market gains is likely to be characterized by a broadening of leadership beyond the megacaps,” and that “investors should also consider opportunities beyond the US for diversification.”

The bank highlighted Asia Pacific, where the MSCI Asia ex-Japan index has risen 16% year to date, as well as select opportunities in European health care, industrials and consumer discretionary.

UBS maintained an overall positive view on U.S. equities, seeing opportunities across financials, health care, industrials, utilities and consumer discretionary.