It's a uniquely positive environment right now for risk assets, says UBS' Evan Brown

Key Concepts

• Mag 7: The seven largest technology companies (Apple, Microsoft, Alphabet, Amazon, Nvidia, Tesla, and Meta) dominating market performance.
• Cyclicals: Industries whose performance is closely tied to the economic cycle (e.g., financials, industrials).
• AI Capex: Capital expenditure related to Artificial Intelligence investments.
• Disinflation: A decrease in the rate of inflation.
• One-Year Inflation Swaps: Financial instruments used to hedge against or speculate on future inflation rates.
• Productivity Story: Economic growth driven by increased efficiency and output per worker.
• Tariff Pass-Through: The extent to which increased tariffs are reflected in higher consumer prices.

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Market Overview & 2026 Outlook

The interview with Evan Brown, Portfolio Manager and Head of Multi-Asset Strategy at UBS Asset Management, focuses on the positive market momentum at the start of the year and potential outlook for 2026. The S&P futures were flat, Nasdaq up ~21 points, and the Dow Jones Industrial Average surpassed 49,000 for the first time, closing at a record high. Brown attributes this strong start to fiscal spending in the US, Germany, and Japan, coupled with expectations of declining inflation. He characterizes the current environment as “uniquely positive for risk assets.”

Investment Strategy: Diversification Beyond the Mag 7

Brown advises against an “all-in” approach, specifically cautioning against over-reliance on the “Mag 7” stocks. He highlights the high concentration risk within major indexes due to the dominance of these seven companies. His recommendation is to diversify into cyclical sectors like financials and industrials, as well as small-cap stocks. He notes that these sectors are already showing strength, with financial stocks hitting all-time highs, and that cheaper options exist globally, particularly in Europe and Japan where banks have been undervalued for years.

He states, “There are very few investors that you could say you need to own more of the Mag 7…We’re all very concentrated if we if we own the major indexes.”

Economic Data & Labor Market Analysis

The upcoming December employment numbers are considered important, representing the “clean numbers” received in a while. While bullish on the economy, Brown acknowledges the steady increase in the unemployment rate, currently at 4.6%, which still represents a “reasonably tight labor market.” He emphasizes the importance of monitoring this trend, stating that continued upward movement in unemployment necessitates a cautious approach. To mitigate risk, UBS is “overweight government bonds” as a hedge against potential labor market disappointments, anticipating inflation will continue to fall.

Key Risks & Potential Disruptors

Brown identifies two primary risks: a labor market disappointment and uncertainty surrounding the return on investment (ROI) in AI capital expenditure (Capex). He acknowledges the questions surrounding whether substantial AI investments will translate into tangible economic benefits. He suggests a potential “deep seek moment” in the tech space, similar to the correction experienced last year, as a possibility. This reinforces the diversification strategy.

He elaborates, “The two big risks…one is the labor market disappointment. The second is, you know, the ROI on AI Capex…would not surprise us at all to have some of that like like a deep seek moment that we had last year happen in the tech space.”

Regarding probabilities, Brown believes a labor market disappointment is more likely, but a negative outcome related to AI could have a larger impact. However, if GDP remains strong despite a softening labor market, it would indicate a “productivity story,” which is viewed positively.

Inflation Outlook & Tariff Considerations

Brown anticipates a continued decline in inflation, driven by factors like decreasing shelter costs, wage pressures, falling energy prices, and disinflationary effects from China’s exports. He notes that outside of tariffs, inflation is already near the 2% target. He expects a temporary spike in inflation due to the “lap[ping] the one year” effect of previous tariff implementations. One-year inflation swaps are already reflecting this expectation by coming down.

Regarding potential changes to tariffs, Brown believes a Supreme Court ruling striking down tariffs would be bullish for the market. He suggests the administration may not be able to quickly reinstate tariffs through legal means, and political considerations related to affordability and upcoming midterm elections might discourage a rapid re-imposition. He acknowledges the administration’s stated intention to maintain tariff credibility but questions the urgency to do so before the midterms.

Treasury Secretary Yellen and the President have publicly expressed a desire to maintain tariffs. Brown notes that while exemptions have been granted, the biggest impact has already been felt.

Logical Connections & Synthesis

The interview establishes a clear connection between macroeconomic factors (fiscal spending, inflation, labor market) and investment strategy. The bullish outlook is tempered by a recognition of potential risks, leading to a recommendation for diversification. The discussion on inflation and tariffs highlights the interplay between economic policy and market performance.

The main takeaway is that while the current market environment is favorable, investors should not be complacent. Diversification beyond the dominant tech sector, coupled with a cautious approach to potential economic headwinds, is crucial for navigating the evolving landscape and capitalizing on opportunities in 2026. The emphasis on monitoring both the labor market and the ROI of AI investments underscores the need for a dynamic and adaptable investment strategy.