UBS: The US stock market continues, and alpha opportunities are heating up

According to the Zhitong Finance APP, UBS released a research report stating that after the tariff announcement on April 2, the U.S. stock market was priced according to a recession scenario, but the probability of the "Goldilocks" (moderate economic growth) scenario has now returned to the average level of March. The bank remains skeptical about the condition of U.S. consumers and is uncertain whether the market has overly discounted the risks associated with tariff policy changes. Currently, the Purchasing Managers' Index (PMIs) continues to decline, but the OECD leading indicators still show that the economy is in the late-cycle expansion phase, and the shift from policy uncertainty to policy outcome uncertainty will lead to market differentiation, with significant differences in industry performance. Sales and earnings expectations have been downgraded across almost all sectors, but the pace of adjustments has slowed. UBS's main points are as follows: According to UBS's model, after the tariff announcement on April 2, the U.S. stock market quickly priced in a recession scenario while excluding the possibility of the "Goldilocks" scenario. This trend has now reversed, and the probability of the Goldilocks scenario has returned to the average level of March. UBS remains skeptical about the condition of U.S. consumers and is uncertain whether the market has overly discounted the risks brought by the recent reversal of tariff policies. UBS's model indicates that the consumer discretionary sector may face more downward pressure, while the communication services and utilities sectors are expected to perform relatively well. Scenario: Uncertainty prevails, late-cycle characteristics continue The Purchasing Managers' Index (PMIs) continues to decline, while the OECD leading indicators show that the economy is still in the late cycle but has not yet exited the expansion phase. The REVS regime tends to favor late-cycle defensive sectors, such as communication services, but as leading indicators weaken, sector preferences will shift more towards utilities. The shift from uncertainty in policy announcements to uncertainty in policy outcomes will lead to market differentiation, with more significant differences in earnings growth and performance across different industries. Earnings: After a month of sharp adjustments, the rate of change has slowed Sales and earnings expectations have been downgraded across almost all sectors, but the pace of adjustments has slowed. The sectors with the largest downgrades include automotive, durable goods, and building materials. The dispersion of earnings scores indicates that there are alpha opportunities in the market. Valuation: Forward P/E ratios mostly rebound, returning to the "growth optimism" range Valuations in the U.S. stock market remain higher than in other regions globally, with dollar-denominated earnings performance still exceeding Europe by 10%, above long-term trends. In the short term, market performance is significantly below UBS's narrative radar model expectations, but this gap is more likely explained by unknown factors in the model, as the overall trend remains correlated. Sentiment: Utilities and consumer staples sectors maintain positive sentiment UBS's crowding data (such as 13-F reports and all-industry institutional brokerage data) shows that there continues to be an overweight long position in the U.S. market, although it has decreased from the peak in March. The significant rotation from cyclical consumer stocks (durable goods and automotive) to defensive sectors (such as consumer staples) has not yet fully returned to normal. Compared to the beginning of the year, the crowding in the technology hardware sector has significantly increased. The beta allocation of actively managed funds remains low. Figure 1: The REVS model maintains a positive evaluation of the utilities and communication services sectors — stocks covered Figure 2: Highest and lowest rated stocks in the US market based on the REVS framework Highest Rated Lowest Rated Figure 3: 4-week quartile returns based on REVS scores (ACW index constituents)