Andrew Garthwaite is chief global equity analyst at UBS. He believes that the recent stock market rally could be coming to a stop as there are signs of slowed US economic growth.
According to the strategist, both macroeconomic indicators as well as market signals suggest that the S&P 500 bullish momentum may be in danger over the next few months.
Garthwaite noted that implied intraindex volatility, a measure for expected changes within the index component components is nearing its lower limit of historical range. This makes it susceptible to a reverse. In a client briefing, Garthwaite noted that cyclicals tend to perform worse when the index volatility increases.
UBS’ strategist has a conservative short-term view, predicting that the US economy will slow in August, and Federal Reserve won’t be able to lower interest rates before September.
Economic indicators signal deterioration
UBS expects the US economy to continue its decline in coming months, which will put further pressure on the markets.
Despite S&P 500’s excellent performance in this year – up 8% by 2025, and over 30% above its lows of April – the underlying trends are still weak.
Garthwaite cited the labor market in particular as an area that is of great concern.
The strategist pointed out that while equity markets shrugged higher tariffs off and sluggish economic data, “3-months annualized hours have weakened dramatically,” while the employment Purchasing Managers’ Index readings suggest a slower pace of job growth.
UBS projects that the growth of non-farm employment will slow down significantly during the fourth quarter. They project a monthly average job count of only 48,000.
Forecasts also include the potential for payrolls to turn negative in Q4, with an estimated loss of 12,000 jobs.
The timing of the Fed and seasonal headwinds
Seasonal patterns may further dampen the investor mood.
UBS believes that August and September are historically the worst months to invest in stocks. This year, UBS does not expect any different results.
Garthwaite reaffirmed that the Federal Reserve will not cut rates until September. This limits the potential for policy support near-term.
The strategist is concerned about the market’s current environment, which he believes is characterized by a combination of seasonal weakness and softening data on the economy, as well as historically low levels of volatility.
UBS says that the S&P 500 has been able to reach record levels despite mounting macroeconomic problems.
If the index is able to maintain its current momentum, it will depend on whether the economy and other indicators of growth are able to stabilize quickly. It also depends on what the Fed does next once they have the ability and space for rate adjustments.
Garthwaite summarized in his note to clients that the risks suggest the bull market may need a break. The months ahead will likely test investor’s patience and confidence.
The post UBS Strategist warns that market rally could stall as US Growth Slows in August may change as new information becomes available.
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