UBS Strategists Predict Year-End Rally in US Equities

Investing.com — UBS strategists foresee a potential year-end rally in US equities, driven by seasonal trends, strong investor sentiment, and reduced market volatility.

The investment bank observes that market volatility has diminished post-US election, creating conditions that may result in significant increases as investors embrace stability.

UBS notes a bullish investor sentiment, especially in options markets, supported by a historical pattern of high US equity risk-adjusted returns in November and December due to seasonal factors.

Their Early Warning Signal (EWS) framework reinforces this outlook, indicating favorable conditions that could boost the S&P 500 index.

However, UBS strategists stress the importance of the rally's pace and sustainability in assessing whether volatility remains low or rises again.

While acknowledging the chance of a swift “melt-up,” it is not their primary expectation.

A “market melt-up” might lead to an increase in fixed strike implied volatility, suggesting a correlation to the VIX, similar to patterns seen in January 2018 after the Tax Cuts & Jobs Act.

Strategists have highlighted the growing risk of economic overheating, with upward trends in both growth and inflation expectations. They favor sectors like Oil & Gas Exploration & Production, though they doubt a broad market melt-up.

Instead, UBS’s team anticipates a gradual “market grind-up” leading to year-end, given that key investor positions are already “max long,” and the expected squeeze risk is balanced by dealer gamma positioning.

In conclusion, they maintain that the VIX could test year-to-date lows as the year ends.