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A perfect equation for the volatile markets? · UBS Trending

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Geopolitical risks are elevated.
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Market leadership is shifting and investors are asking
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new questions.
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Is a broader market really a better one?
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And what matters most as volatility rises?
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We're going to take a look
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beyond the headlines to explore market breadth, earnings quality
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and how investors should be thinking about positioning portfolios
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from here.
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All that and more coming up on UBS trending.
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Hi everybody and welcome to UBS trending.
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I'm Anthony Pescatore.
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Thank you so much for joining us today.
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I'd love to.
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Welcome back to the studio.
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My guest Julia Hermann global strategist.
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Global market strategist from New York Life Investments.
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Thanks for coming back by the way. It's good to see you.
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Thank you so much for having me back. Yeah.
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Last time you were here and we weren't even in the studio.
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We were in our previous one.
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We were talking specifically about AI and energy and boy,
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that is a conversation that has happened many, many times.
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And I'm sure you've had it as well.
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But, you know, we're now sitting here at a very different time.
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You know, we've got the Iran conflict
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as we sit here in various stages of cease fire,
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and there's still conflict,
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there's still written,
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you know, resolutions are not quite yet arrived at.
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There's so much uncertainty in the markets and there's
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this kind of sentiment of broadening, sort of broadening
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your portfolio looking further
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than just down the straight and narrow
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path of large caps in tech,
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which we talked about really for the last two years.
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So what should
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what should investors be focused on right now, Julia,
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that goes beyond these day to day headlines
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that can be sort of a whipsaw, a lot of shock.
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And or sometimes it's calm.
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We just don't know what to expect from a day to day.
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Right. Exactly.
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I think we need to go back to the start of the year,
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which feels very long ago.
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But Wall Street entered this year with consensus optimism.
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And now the Iran conflict is one of several distinct disruptions
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that is greeting what was originally a very constructive scenario
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and one
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that we have shared as a team and one that we actually stick to.
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In addition to Iran, markets are coping
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with a maturing credit cycle.
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They're also maturing, coping with,
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sentiment shifts around
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artificial intelligence, a lot
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like what we spoke about last year. Anthony.
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So if we take the Iran conflict specifically, again,
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going back to the start of the year,
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markets started with a truly risk on sentiment.
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We saw the US underperforming, developed and emerging markets.
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We saw
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the dollar was rangebound
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in the US, we saw small caps outperforming large caps.
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The only kink in that story was the shift in sentiment
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in AI where we saw growth underperforming value.
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Then the Iran conflict hits, and I think we've entered
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a bumpy, imperfect version of a flight to safety
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that would be seen in the US now outperforming global peers
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and a strong bid behind the dollar.
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But what I think this reminds us all to do this
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year, candidly, Anthony, is to come back to the fundamentals.
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One of those fundamentals is a flight to safety,
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market mechanism that had been in doubt for a really long time.
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And now today is functioning roughly as expected.
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But the other fundamentals are in terms of core profitability,
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core quality in the markets we came into this year
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with strong consumer activity, strong corporate profitability,
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and an expectation for relatively constructive policy
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environments globally.
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And on our team, we haven't abandoned that constructive outlook.
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You know, we've we've used the word uncertainty for a long time.
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But this year, particularly even before the Iran conflict,
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there was a lot of uncertainty around AI.
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And specifically we were talking about the impact
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potentially to software.
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And is AI going to be taking that away from software,
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a big software company.
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So from the beginning of the year,
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our CIO has put out
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the theme of the great broadening, which, you know, kind of steps
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a little bit away from just mega-cap names to a broader
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look at sectors, broader look at, you know,
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different regions across the world.
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What is the broadening the market broadening mean for you?
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And you think about the aspect of kind
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of taking a bigger, broader look at what's available out there.
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And like you said, that sort of flight to safety kind of feeling.
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Sure.
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Well, what's so fun about market
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broadening is you can measure it with almost any market indicator
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you want.
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A few of our favorites are just basic performance, participation
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and also profitability.
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So if we start with performance, there's actually,
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I think, a fair bit of room for debate
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about how narrow the market
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had even been over the last few years.
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In 2023, we have to admit, things were very, very narrow.
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The Magnificent Seven delivered
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over 100% price performance relative to about 15%
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for the remaining 493,
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so almost eight times the degree of price performance.
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But in 2024 and 2025, that narrowed
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to about four times, and then less than two times.
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So we did see a bit of a broadening
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actually already permeating into the market.
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And what's so important about that is almost less that I share
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in that performance declined over time,
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and more that in the rest of the market.
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In the 493, they were delivering
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average annual returns in that three year period of about 15%.
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That is comfortably above the long term annual average that U.S.
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equities have been delivering over time, which is roughly 10%.
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And I think it speaks to the fact that you can continue
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to have conviction in tech, which our team very much does, while
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still having
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constructive expectations for absolute returns
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across other asset classes and styles. Yeah.
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And even if you look even at something
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like the small and mid-cap space, there's even more opportunity
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there as they've sort of underperformed those large cap peers.
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But you're right, those other 493, 493 stocks in the S&P
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really took a backseat to the Mag 7 in 2023.
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In 20 actually to 2024 and 2025.
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And now they're starting to get attention again.
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So it's interesting to kind of see
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how it's becoming a little bit more narrow.
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Like participation itself is widening.
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But the actual differences
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between those firms at the top are narrowing a little bit.
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But let me ask you a question,
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because I'm reading some of your research.
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And then we were kind of talking back and forth.
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You kind of go in with this thesis of broader doesn't
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always necessarily mean better.
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Just can you maybe talk about that?
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Because I don't want to generalize and say,
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oh, if you just broaden,
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everything's going to work out just fine.
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We all know that there's risks
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no matter where you go when you're investing.
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Talk about the broader is not necessarily
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better concept that you have. Yeah, absolutely.
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So it's really the difference between a broader
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market and a shift in market leadership.
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That's actually
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what we've been seeing year to date before the Iran conflict is
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we had a shift in market leadership from tech
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to more risk on themes.
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And as we know, those risk on themes were quite vulnerable
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to geopolitical disruption. Right.
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So that's why we have such a broad definition
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of what market breadth can include.
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And for us, part of that is also profitability.
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And in that sense
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we can maintain conviction and tech here
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because tech is the profitability hub of US sectors,
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U.S styles, U.S site or equity sizes globally.
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We've sliced and diced it
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almost every way we can possibly think to do it. Exactly.
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And tech is the profitability leader.
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But what is unique I think about that story is that doesn't
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have to come
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at the cost of the performance of other portions of the market
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in 2023 and 2024, for example, we saw a big surge
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in tech
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related earnings growth,
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and it led that of the rest of the market.
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We think that that created a halo effect,
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actually pulling up equities overall
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and doing
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so in a time
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that wasn't very constructive to capital markets conditions.
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The fed had rates
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at a quite restrictive level for 2023 and for most of 2024,
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and we saw the the loose financial condition effect
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created by tech as being a powerful counterbalance.
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And it was kind of a stabilizing force
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for some of the rest of the markets in that
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with that halo effect that you're referring to.
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Exactly, exactly.
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And, you know, we can't necessarily completely attribute,
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something like a halo effect to AI in general.
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Consumption, for example,
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has been really strong over this period.
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Very, very resilient, as has broad corporate profitability.
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But generally speaking, the hub and the engine of this
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has has come from the tech side,
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and you're generating better returns on equity
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in some parts of the, of the, of the index.
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When you're looking at a lot of these large cap names in general.
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And again, again, that could be part of that halo effect.
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Yeah, exactly.
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And you know, you can use almost any profitability measure.
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But generally speaking, it's very difficult
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to say that valuations in tech read outright expensive.
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Yeah.
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Because of the incredible profitability that comes along with it.
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But there are other sectors as you'll see in the chart,
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that read quite well on that type of a screen.
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Staples, for example. It reads quite well.
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So this isn't a tech specific story, right?
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Right, exactly.
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Yeah.
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I think we have to kind of get out of that mindset,
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you know, as investors
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and as looking at the markets that AI is driving everything,
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that there are still, you know, people still need toilet paper.
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Yeah. You know, so there's. Yeah. Exactly.
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When you talk about staples.
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So let me ask you a question then, Julie,
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if investors like who are watching
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this, people are watching this,
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they're thinking about, okay, there is uncertainty still remains.
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Volatility is still something that we're keeping an eye on.
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It is a little higher than it has been, but
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not as high as it was in April of last year.
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What should investors be thinking about going forward, given
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what we know is happening now
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and what we don't know will happen
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in the next couple of weeks or months? Sure.
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Which is, by the way, if we all had a crystal ball, right?
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Right. But we don't.
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So what is your what is your research show?
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Well, so that's exactly it.
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No one has the crystal ball.
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So for us this year is all about bolstering
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portfolios against a wider range of possible outcomes, as opposed
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to piling a portfolio
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into one potential macro market geopolitical outcome.
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And to do that,
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we're leaning on a few themes
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that honestly have fallen by the wayside
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quite a bit in the last
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15 years classic investment disciplines,
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diversification and quality.
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They sound really boring, but when you bake them into,
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recommended asset classes, it becomes quite clear.
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So for example,
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in the tech story,
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we feel comfortable maintaining a market weight
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neutral allocation there
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because the quality measured in profitability is there.
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But we also like leaning into a more diversified version
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of that theme, really speaking to the infrastructure around
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all of that that speaks to energy, materials, infrastructure.
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And as I can already see the gears moving in your head
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connecting these dots,
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all of those sectors are also ways to hedge around
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geopolitical risk.
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So you can meet the needs of, trying to,
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trying to incorporate different themes in a portfolio
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with the same asset class choices. Right?
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I mean,
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we didn't really even touch on energy today
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because it is a whole separate conversation.
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And obviously there are constraints, given, you know, global oil,
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availability and the price of, you know, a per barrel.
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But obviously AI is not stopping anytime soon.
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So energy is still going to need
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to be found and consumed and use.
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So that's that's another conversation.
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But I kind of like the idea of diversity.
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We all believe in a diversified portfolio.
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It's something that we commonly, I think all can agree on.
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And obviously,
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even when you're looking at small and mid-cap,
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you know, if the fed does
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cut twice
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later this year, which we expect at CIO, that they will,
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small mid-cap companies are much more levered
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than large cap companies,
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so they'll be more attractive rates for them to
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then build their businesses.
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So there seems to be opportunity across even different levels
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of the market, small, mid and even in the large cap space.
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Yeah, absolutely.
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And look risks around everything are rising right.
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But there's also a really good reason
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to still have conviction in a constructive scenario.
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And our team absolutely does.
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For example,
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we still think it's possible
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that the fed will ease interest rates this year.
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It's no longer a consensus view, but it's based on the
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the fact that there are still a balance of risks,
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as opposed to trying to get in line
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with one singular global outcome. Right.
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And so in that sense, keeping a global allocation still balanced,
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perhaps with an eye toward currency risk management
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is also still something that's a really compelling to us, right?
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I mean, Julia,
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we could probably sit here and talk for another 20, 30 minutes
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just to so much great content.
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Thank you for coming by and giving us your
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your take on the markets.
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And, we'd love to have you back again soon. Please come back.
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I'd love to.
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Thank you.
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Great to see you.
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Julia Harman, Global Market strategist
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from New York Life Investment Management.
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And thank you all for joining us.
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There's a lot more information from our great partners,
12:16
Nick Nilam and our own Chief investment office
12:18
on our website at UBS. Dot com forward slash views.
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Plus you can follow us on social media.
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We're on LinkedIn and Facebook.
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Plus UBS Studios has its own Instagram channel at UBS trending
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lots of content there for you.
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And as always,
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if you do have any questions
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or would like to continue this conversation,
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please make sure that you're doing so
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with your financial advisor.
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Until next time, I'm Anthony Pastore.
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We wish you a great rest of your day,
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and remember to keep your eyes on what's trending.
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See you soon, everybody. Thanks.