UBS says the path of least resistance for risk assets remains higher, even as the VIX index of implied U.S. equity volatility fell to its lowest level this year on Friday. The gauge, derived from S&P 500 options, is widely read as a proxy for the turbulence investors expect over the coming month, and long stretches at low levels are often debated as a sign of either genuine calm or creeping complacency. The bank argues that the calm is supported by fundamentals rather than complacency, including resilient growth, improving earnings expectations, and a policy backdrop that may prove less restrictive than markets assume.

Few major catalysts are expected before Nvidia's earnings and Federal Reserve Chair Kevin Warsh's Jackson Hole speech in late August, leaving a relatively quiet window heading into month end. The chipmaker's results have become a widely followed barometer of AI-related demand, while the annual Wyoming symposium has historically been a venue where Fed chairs lay out shifts in the policy outlook.

The bank does not dismiss the risks. Israel struck Lebanon over the weekend, with Prime Minister Benjamin Netanyahu saying the action was retaliation for an earlier Hezbollah attack. The path toward reopening the Strait of Hormuz — the narrow chokepoint that carries roughly a fifth of the world's oil — remains unclear, and Russia-Ukraine attacks have intensified again. UBS says these developments keep geopolitical risk live, but none of them, on their own, appear sufficient to derail the broader constructive setup.

On growth, UBS points to a mixed but still resilient picture. July retail sales fell for the first time in nine months and by the most since May last year, but the bank frames that as a soft patch rather than evidence of a broader slowdown. Recent credit card data show little deceleration in spending, and spending growth among lower-income households is catching up with higher-income cohorts. Expanding factory activity also supports the case for an improving cyclical backdrop, even after the sharp rise in oil prices this year.

Corporate earnings remain the clearest positive surprise, according to UBS. Growth expectations have risen sharply since the start of the year on stronger-than-anticipated profitability across corporate America. The bank does not expect that pace to last indefinitely, but says revisions remain positive. It also notes that AI investment continues to show encouraging monetisation, while strength is broadening across sectors rather than remaining concentrated in a narrow group of names.

UBS sees the policy backdrop as the most important potential tailwind for equities. Markets are still pricing in more than one Fed hike over the next year — a path implied by interest-rate futures — but a recent run of data, including softer payrolls, moderating inflation, and the drop in retail sales, has weakened the near-term case for tightening. The bank expects continued disinflation in upcoming data to allow the Fed to stay on hold, and says a clearer signal of an extended pause this year would provide another boost for risk assets.

The bank expects volatility to rise over the coming weeks and months, but it maintains a constructive outlook into year end and continues to favor broadly diversified equity exposure across sectors and regions.

Earlier, U.S. stock indices closed lower on the day, with declines led by the S&P and the Dow.