UBS' Lefkowitz shares his bull case for U.S. equities

Key Concepts:

• Contrarian buy signals: Market indicators suggesting a buying opportunity when most investors are bearish.
• VIX (Volatility Index): A real-time index representing the market's expectation of volatility over the next 30 days.
• Investor sentiment: The overall attitude or feeling of investors towards the market.
• Investor positioning: The allocation of investors' assets across different asset classes.
• Earnings momentum: The rate at which a company's earnings are growing.
• Secular growth: Long-term, structural growth trends in the economy or specific industries.
• AI-levered companies: Companies that benefit significantly from the development and adoption of artificial intelligence.

Market Overview and Recovery

• The market closed the week mostly lower, but the S&P 500 is up more than 7% since April 11th.
• David Lefkowitz from UBS Global Wealth Management upgraded US equities to attractive on April 11th.
• The market bottomed around April 7th or 8th, followed by a recovery of more than half of the losses.
• The backdrop is still fairly constructive due to powerful contrarian buy signals in early April.

Contrarian Buy Signals

• The VIX had one of its highest readings in history.
• Investor sentiment was very cautious.
• Investor positioning was extremely depressed.
• Historically, when these conditions occur, US stocks tend to perform well over the subsequent 12 months.

Market Outlook and Potential Slowdown

• While there's a lot of "wood to chop" with trade negotiations, the big picture suggests stocks will grind higher over the next 12 months.
• A slowdown in economic data is expected.
• After a significant spike in the VIX, its return to the normal range (low 20s) usually indicates that new lows are unlikely.
• A potential sell-off of around 5% is possible, consistent with historical patterns.

Valuation and Earnings Momentum

• Valuation is not a good predictor of near-term returns but is more powerful for long-term returns.
• The key driver for the next leg higher is the improvement in earnings momentum.
• Analysts are currently cutting earnings estimates.
• A more sustainable rally will occur when analysts stop cutting estimates, likely later this year.

Market Leadership and Sector Emphasis

• Since April 2nd and the market low, secular growth companies, particularly those levered to AI, have been market leaders.
• These companies were initially hit earlier in the year due to concerns about the durability of AI trends.
• There is a significant opportunity within the AI ecosystem, including the infrastructure needed to support these companies.
• Sectors to focus on include tech, services, and utilities due to the power needs associated with AI.

Conclusion

The market has shown resilience since the lows in early April, driven by contrarian buy signals and a recovery in investor sentiment. While trade negotiations and potential economic slowdowns remain concerns, the focus should be on the long-term potential of secular growth companies, particularly those in the AI ecosystem. The key to the next leg higher will be an improvement in earnings momentum, which is expected later this year.