UBS says US equity market is too upbeat on the Fed achieving a soft landing for economy

<p>Via a note from UBS Wealth Management on the S&amp;P500, noting the stalling rally this week after a strong YTD. </p><p>In brief from the note:</p><ul><li>the market is too upbeat about the prospect that the Fed can achieve a soft landing for the US economy</li><li>
Risks remain that the Fed could hike more than markets are expecting. </li><li>The delayed effects of prior hikes are still feeding through, adding to headwinds for the economy. <ul><li>nominal yield on the 10-year Treasury … rose … to … the highest level since the collapse of Silicon Valley Bank in early March.
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Equity market valuations leave little room for policy error. <ul><li>The US equity market is trading at 19.3 times 12-month projected earnings, a roughly 19% premium to the 15-year average …Such multiples have historically been associated with periods in which 10-year US Treasury yields have been below 2%, rather than close to 4% as at present, and also periods of robust earnings growth. Given that 12-month trailing earnings per share growth has remained above the post-1960 trend rate, we see little potential for a swift bounce—even if the Fed succeeds in guiding the US economy to a soft landing.</li></ul></li></ul><p>
UBS conclude:</p><ul><li>So, against this backdrop, we see a better risk-reward outlook for fixed income over equities. </li></ul><p>–</p>

This article was written by Eamonn Sheridan at www.forexlive.com.