Global equities: Rally or selloff? Which catalysts matter most?

Investing.com -- Global equities face rising odds of both a correlated rally and a correlated selloff over the next two weeks, UBS strategists say, with earnings season, the Fed meeting and the U.S. midterms determining which path markets take into 2027.

Strategists led by Keith Parker said market internals showed "accelerated de-risking" last week, with defensives outperforming cyclicals, high quality outperforming low quality, and Europe outperforming the U.S. The bank’s AI 100 basket fell 5% as CoreWeave’s credit default swaps surged, while the rest of the market, excluding AI names, rose 2.5%, with every equal-weighted S&P sector gaining except technology.

Bond yields fell even as inflation data came in "hot" and oil prices jumped 10% on fears of escalation involving Iran. The strategists viewed that combination as "a good sign" heading into the Federal Reserve meeting and a heavy stretch of earnings reports.

UBS identified five "circuit breakers" that will determine market direction: hyperscaler cloud earnings, the Fed’s rate path, developments around Iran and oil, the U.S. midterm elections, and corporate buybacks. The bank said its own forecasts sit roughly 15% above consensus on U.S. cloud sales for the next four quarters, meaning earnings beats from companies including Meta, Microsoft, Alphabet and Amazon "can fuel another leg up in AI trades and the market."

Commenting on the monetary policy path, strategists said history favors stocks if the Fed’s hiking pace stays contained. When the Fed has raised rates by less than 100 basis points within a year of a 10-year yield spike, global and U.S. equities have rallied 8% to 10% on average over the following six months, and 15% to 18% over the next year, versus weaker returns following larger hiking cycles, they noted.

UBS laid out several trade ideas tied to this framework, including buying S&P 500 out-of-the-money calls targeting a year-end rally, using high-yield debt downside structures to hedge against yields and credit spreads rising together, and favoring U.S. utilities and industrials over consumer staples.

It also recommended trimming exposure to the energy sector and favoring South Korea over India, along with the S&P 500 over the U.K.’s FTSE 100, citing the S&P’s 22% stronger relative earnings growth over the period in which it has underperformed the index by about 15%.

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