UBS Equities-US Equity Strategy _Simply U.S.A. Stick to whats working_ ...-117435275

ab25 August 2025Global ResearchUS Equity StrategySimply U.S.A.: Stick to what's workingEconomic regime uncertainty
The probability of economic slowdown vs expansion remains in flux. While we continue to prefer late cycle cyclicals and growth defensives, less favored themes and sectors are showing signs of fewer negatives.
Momentum in the US is still comprised of preferred themes including the AI landscape, US Reshoring, and Financials. Rate cuts being viewed favorably by the market could lead to more low quality outperformance.
S&P 500 EPS is still expected to grow by ~9% this year and revision breadth remains positive. Regime: Expansion and slowdown probabilities remain splitThe OECD CLI used in our REVS framework continues to switch between slowdown and expansion. Sector PMIs for the S&P 500 though continue to reflect a more buoyant expansionary mood. Our market implied economic regime probability also suggests markets are pricing a more optimistic outlook (Goldilocks probability increased to 32%). As a result, late-cycle cyclicals and a few growth defensives continue to top our regime rankings. These include Communication Services, Technology, Utilities and Industrials. The positive market reaction following Jackson Hole on Friday suggests that Fed cuts are being interpreted as a positive for the time being. Small caps and low quality could continue to outperform as rate cuts help alleviate balance sheet pressures.Earnings: Slower but still strong growth, revisions breadth remains positiveEarnings revision breadth for the S&P 500 and small caps has continued to increase and remains positive. Only select sectors such as HC Equipment and Services are seeing continued earnings momentum weakness. Tariff sensitive sectors such as Autos and Components and Consumer durables remain negative but have seen improvement over the past month. The market is still expecting very strong (>15%) growth from semis, pharma and media companies. The S&P 500 is still expected to grow EPS ~9% in 2025.Valuations: Elevated but earnings and flows remain supportive for nowThe S&P 500 looks expensive on a forward P/E of more than 22x; 18.9x for S&P 500 ex Tech+. Valuation concerns matter more when EPS downgrades are underway, but continued stabilisation and widening breadth of improvement should be an offset near term. We think that modern market structures like buybacks and reliable flows from global pension savings schemes contribute to the 'momentum'. If hard data/jobs begin to weaken faster negative earnings revisions could lead to increased volatility and more sellers, but there are strong arguments that this market structure continues to offset valuation downside in the US. Sentiment: Comm Services, Tech, and Financials have strong positive sentimentOur positioning beta analysis suggests Balanced funds are back to below average beta positioning following the spike in July. Hedge fund positioning data suggests a rotation out of Banks and into Food & Staples Ret