UBS Equities-US Equity Strategy _Simply U.S.A. A step up in overheating ...-117764532

ab15 September 2025Global ResearchUS Equity StrategySimply U.S.A.: A step up in overheating probabilityOverheating probability inflecting higher as breadth widens
Our market implied economic regime probabilities suggest markets are starting to price overheating; while it is still early (12% currently) it does look like it may be inflecting and could lead cyclicals higher.
Software, Media & Entertainment, Semis & Equipment and Banks are top ranking industry groups in the S&P 500 this month while HH & Personal Products, Chemicals, and Containers & Packaging are among the worst scoring driven by Earnings and Regime scores.
The earnings growth gap between Tech+ and the rest of the S&P 500 is expected to normalize through 2026 based on consensus estimates.Regime: PMIs are back to expansion territoryThe OECD CLI used in our REVS framework has moved back into expansion while the sector weighted PMIs for the S&P 500 remain resiliently expansionary. Tech sector PMIs fell slightly in August. Our market implied economic regime probability suggest markets are starting to price overheating, while it is only at 12% currently, it appears to be inflecting and could rise further depending on the tone of the FOMC decision. This could drive further cyclical outperformance as Autos & Comp, Cons Dur & App, and Div Financials are among the most sensitive industry groups to our overheating probability. Within our S&P 500 REVS scorecard 26 of 27 industry groups are positive, a signal for more broadening and a catch up. Earnings: Minimal revisions post earnings season, revisions breadth remains positiveSemis & Equipment saw an inflection higher in earnings expectations but broadly revisions have been stable over the past month. HC Equipment and Services and Autos & Comp continue to have negative revisions but did show signs of easing this month. Big 6 Tech+ earnings gap vs the rest of the S&P 500 is expected to normalize in 2026 reducing earnings dispersion. The market is still expecting very strong (>15%) growth from Semis, Pharma and Media companies. The S&P 500 is expected to grow EPS more than 10% in 2025.Valuations: Elevated but earnings and sentiment remain supportive for nowThe S&P 500 looks expensive on a forward P/E of more than 22x; 18.6x for S&P 500 ex Tech+. Valuation concerns matter more when EPS downgrades are underway, but continued improvement 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 have increased once again driving our composite beta