UBS Equities-Global Equity Strategy _What to do as the Fed cuts… normally...-117809006

ab17 September 2025Global ResearchGlobal Equity StrategyWhat to do as the Fed cuts… normally and this timeWhat to do as the Fed starts (or restarts) a rate-cutting cycle:1. No recession this time around. 56% of the time when the Fed has cut rates, we have had a recession (on average 5 months later, if it occurred), and historically there has been a recession every time after the Fed has cut more than 75bps in the last 40 years. However, we don’t see the classic preconditions for a recession (commodity shocks, excess private sector or bank leverage or clear-cut excess investment). The only time the Fed restarted an easing cycle without being accompanied by a recession was June 2002, so this situation is unusual.2. Markets: If the Fed were to cut by 1% from September 17th to year-end, then we would have all the 7 preconditions for a bubble that we are not yet in. We believe that the probability of a bubble in 2026 is 35% (hence, we stick to our end-26 target of MSCI AC World 1020). If the Fed cuts and there is no recession, then 12 months later markets have risen 17% historically, on average. We have seen only one period since 1981 when rate cuts were continued after a pause of 6 or more months but we did not have a recession (June 2002) - and on that occasion, markets were up 15% a year later. To us, the most analogous period to the current environment is September 1998. 3. This reinforces the AI story. Tech typically outperforms 75% of the time in the 12 months after the first rate cut (if there is no recession). Software has been the best performing sector if short rates fall more than long rates (and there is no recession), and the Nasdaq outperforms on all occasions in the 12 months after a cutting cycle has resumed and 80% of the time if rates are cut and there is no recession.If there is a bubble, we think it could be in Gen AI (our preferred stocks are Meta, MSFT, Amazon and TMSC), electrification (Eaton, Schneider) and gold.4. The dollar weakens. It weakens 80% of the time in the 1 month after the first rate cut (in those periods when there has been no recession following the rate cut); it weakens 60% of the time over the next year. If US rates and growth weaken more than expected, then logically the dollar weakens. Moreover, there are good structural arguments for dollar weakness (see here). Plays on a weaker dollar include domestic Europe (retailing, budget airlines, banks) and, in the US, software and capital goods tend to be the best-performing sectors. 5. Focus on EM. Emerging markets outperform 75% of the time in the 12 months after the Fed starts (or restarts a rate-cutting cycle and there is no recession) and on all occasions when the Fed restarts a cutting cycle after a pause. We recently upgraded EM (see here). We particularly highlight Brazil, China and the indirect plays on EM (such as Reckitt Benckiser, Ashmore, Prosus and Coca-Cola). Cont. Europe has outperformed 56% of the time in the 6 months after the Fed started or rest