MW Why the stock market will be performing a high-wire act over the summer, according to UBS

By Jamie Chisholm

Analysts may be too optimistic about earnings, and valuations are again stretched, strategists say

Investors return after the Juneteenth break with the S&P 500 less than 3% shy of its record closing high despite lingering trade uncertainty and the possibility of the U.S. becoming directly involved in the Israel-Iran conflict.

Wall Street's stoic performance reflects a belief among many that the world's biggest economy can still avoid a recession.

However, a team of strategists at UBS, led by Sean Simonds, reckon it's too early to sound the all clear. In a note published Friday they say a batch of signals they observe suggest the U.S. economy is in a "slowdown regime", though "the inflection is so shallow we just don't know [if] it's a real turn lower yet or not."

Yes, the labor market is starting to struggle, but overall the economic slowdown has been quite meek compared to some investors fears.

The problem is that any further economic deterioration would hit a stock market that is now vulnerable to bad news after its recent strong rally from the April lows.

The current relative optimism about corporate profits would be badly damaged were the economy to deteriorate further. The UBS team note that analysts are predicting sales growth for 2025 of 5% and earnings per share (EPS) growth near 10%. "We do expect these will continue to slide for the remainder of the year on weaker hard [economic] data," they say.

The Swiss bank also notes that a big chunk of those overall market earnings come from expected 17% EPS growth for the Magnificent Seven grouping of stocks, "a number that has not been materially downgraded with the rest of the market recently."

Another concern is valuations. The S&P 500 is expensive on a forward P/E of 22 times with slowing growth expectations, says UBS, though the strategists acknowledge that the resilience of the AI sector may help justify it for now.

UBS also expect that buybacks and constant flows from global pension funds will support stocks and mitigate the impact of selling if economic conditions deteriorate.

All told, the current market set-up suggests no longer chasing the rally and increasing exposure to defensives through the summer, says UBS.

Still they add: "It is not yet time to be contrarian on tech/AI themes with the power and software stocks in particular seeing relative earnings revision strength that is sufficient to limit valuation and positioning concerns." Their to- ranked stocks include Broadcom $(AVGO)$, Qualys $(QLYS)$, Zscaler (ZS) and Pure Storage (PSTG).

In contrast, UBS thinks that consumer sectors including housing, personal products, durables, retail and auto all continue to look vulnerable from here with more downside possible if hard data continues to slide. Their lower ranked stocks include Polaris $(PII)$, American Eagle $(AEO)$, and Deckers Outdoor (DECK).

Markets

U.S. stock-index futures (ES00) (YM00) (NQ00) are lower as benchmark Treasury yields BX:TMUBMUSD10Y rise. The dollar index DXY is down, while oil prices (CL.1) slide and gold (GC00) is trading around $3,356 an ounce.

   Key asset performance                                                Last       5d      1m      YTD     1y 
   S&P 500                                                              5980.87    -0.69%  2.33%   1.69%   9.00% 
   Nasdaq Composite                                                     19,546.27  -0.35%  3.57%   1.22%   9.43% 
   10-year Treasury                                                     4.417      4.90    -12.30  -15.90  15.30 
   Gold                                                                 3372.9     -2.31%  0.46%   27.80%  44.47% 
   Oil                                                                  73.87      0.94%   19.61%  2.78%   -8.34% 
   Data: MarketWatch. Treasury yields change expressed in basis points 

The buzz

U.S. economic data due Friday include the Philadelphia Fed manufacturing index and the leading economic indicators.

Iran meets with officials from the U.K. France and Germany in Geneva on Friday after U.S. President Donald Trump signaled a two-week window for diplomacy to make headway before he decides on taking military action.

Home Depot $(HD)$ has made an offer for building-products distributor GMS $(GMS)$, starting a potential bidding war between the home-improvement giant and serial dealmaker Brad Jacobs, according to the Wall Street Journal.

Shares of Robinhood Markets (HOOD) are down 1% after a report that X will soon provide trading on the social-media platform

Best of the web

Softbank pitches $1 trillion U.S. AI hub to TSMC, Trump team.

The truth behind Mark Zuckerberg's macho man makeover.

Americans are side-hustling like we're in a recession.

The chart

Retail investors are shifting away from large AI plays like Nvidia, and seeking exposure to the technology via smaller companies, according to analysis of investor trading by Vanda Research. This means purchases of semiconductor and software names have fallen, while increased buying of "smaller-cap names reflects retail's ongoing pursuit of AI-derivative themes e.g., data center energy infrastructure, quantum computing, and adjacent plays," says Marco Iachini, Vanda's senior vice president research.

Top tickers

Here were the most active stock-market tickers on MarketWatch as of 6 a.m. Eastern.

   Ticker  Security name 
   TSLA    Tesla 
   NVDA    Nvidia 
   GME     GameStop 
   PLTR    Palantir Technologies 
   AMD     Advanced Micro Devices 
   TSM     Taiwan Semiconductor Manufacturing 
   HOLO    MicroCloud Hologram 
   AAPL    Apple 
   COIN    Coinbase Global 
   AMZN    Amazon.com 

Random reads

Hunters refuse to shoot 'scared but not aggressive' city bear.

And in other ursine news: Michigan bear had bin lid stuck on its neck for two years. Not anymore.

Humanity is doomed: Man with real-life girlfriend and child proposes to AI chatbot after programming it to flirt.

-Jamie Chisholm

This content was created by MarketWatch, which is operated by Dow Jones & Co. MarketWatch is published independently from Dow Jones Newswires and The Wall Street Journal.

(END) Dow Jones Newswires

June 20, 2025 06:57 ET (10:57 GMT)

Copyright (c) 2025 Dow Jones & Company, Inc.