UBS maintains a constructive outlook on equities, citing easing geopolitical risk, broadening corporate earnings, resilient economic data, and a patient Federal Reserve as key pillars supporting the current market rally. The bank's strategists argue that the drivers underpinning the rally extend beyond artificial intelligence hype, suggesting limited near-term downside for stocks. The assessment places UBS among the more bullish Wall Street houses, even as some rivals urge caution about concentration risk in AI-led megacap gains.

Progress toward reopening the Strait of Hormuz, even without a finalised agreement, has helped push oil prices lower and alleviated investor concerns that elevated energy costs could reignite inflation pressures. UBS says the resulting reduction in geopolitical risk premium has allowed markets to refocus on company fundamentals rather than headline-driven volatility, removing one of the more prominent overhangs on sentiment that had built up during the summer.

On earnings, UBS says corporate results continue to validate the investment case for artificial intelligence, though investors are becoming increasingly selective about where genuine value is being created. Recent results from Palantir followed a string of hyperscaler earnings that UBS said helped restore confidence in the AI trade after a volatile July exposed a growing divide between companies delivering returns on AI spending and those facing rising cash flow strain. The scrutiny comes as total capital expenditure commitments from the largest cloud and AI infrastructure companies have scaled to unprecedented levels this year.

Microsoft shares jumped after the company reported its fastest pace of cloud growth in four years, while Meta shares fell sharply after free cash flow dropped 91% to its lowest level since late 2022. UBS cited this divergence as evidence that markets are becoming more discerning about which companies are effectively monetising AI investment, rewarding those showing tangible revenue acceleration while penalising those whose margins are under pressure from heavy spending.

See earlier coverage: JPMorgan warns AI-driven stock momentum echoes dot-com era extremes

UBS also pointed to resilient US economic data as a supportive backdrop for a broader market rally. The ISM Manufacturing PMI rose to 55.6 in July from 53.3 in June, beating consensus expectations of 54.0 and marking a seventh consecutive month of expansion. The bank noted that output accelerated and new orders grew solidly, while cost pressures eased and strong AI-related investment helped offset the drag from import tariffs. UBS said improving manufacturing sentiment supports its view that cyclical sectors can help broaden participation in the rally beyond technology, potentially drawing in mid-cap names that have lagged the megacap-led advance.

Earnings growth is also becoming less concentrated among a narrow group of megacap technology stocks. Approximately 80% of S&P 500 companies have beaten earnings expectations this season, above the historical norm of roughly 73%, with a median earnings beat of 5.8% compared with a long-run average of 3.5%. Forward guidance has also come in stronger than usual. UBS now expects second-quarter earnings per share growth to reach or exceed 30% on an underlying basis, ahead of its initial 28% estimate. The breadth of beats suggests the earnings recovery is extending beyond the handful of companies that dominate index-level growth.

The Federal Reserve's patience remains another important support for risk assets. The central bank held its federal funds rate steady at 3.50% to 3.75% last week, with Chair Kevin Warsh characterising the Fed's current stance as a period of "watchful thinking." Core CPI inflation slowed to 2.6% in June, and labour income growth points to more moderate consumer spending ahead.

UBS said these developments give the Fed scope to remain patient while assessing whether inflation is sustainably returning toward target. The bank's base case is that policy stays on hold unless the recent decline in core inflation stalls or energy- and tariff-related risks intensify. Incoming inflation prints and labour market data over the coming weeks are likely to determine whether that patient posture is sustained.

Taken together, UBS said strong AI investment, resilient economic data, broadening earnings growth, and a patient Fed continue to underpin its constructive view on equities.