UBS says the VIX dropped to its lowest level of the year on Friday, and the bank reads the calm as earned rather than complacent. The bank argues the path of least resistance for risk assets remains higher, pointing to resilient growth, improving earnings expectations, and a softening case for a Fed rate hike, with Nvidia's earnings and Fed Chair Kevin Warsh's Jackson Hole speech as the next test before month end.
The VIX fell to its lowest level this year on Friday, leaving few major catalysts priced in before Nvidia's earnings and Warsh's Jackson Hole speech in late August. UBS argues that gap reflects improving earnings revisions and a softening near-term case for a Fed hike, not investor complacency.
Geopolitical risk stays live
UBS does not dismiss the risks still on the table. Israel struck Lebanon over the weekend, and Prime Minister Benjamin Netanyahu said the action was retaliation for an earlier Hezbollah attack, while the path toward reopening the Strait of Hormuz remains unclear and Russia-Ukraine attacks have intensified again. None of these, in UBS's view, is enough by itself to knock the broader positive setup off course.
Growth and earnings hold up
On growth, UBS points out that July retail sales dropped for the first time in nine months, the steepest fall since May of last year, though it treats the reading as an isolated soft patch rather than a broader slowdown. Credit card data show little deceleration in spending, and lower income household spending is catching up with higher income consumers. Expanding factory activity adds to the resilience picture, even as oil prices have risen sharply this year.
Earnings growth expectations have risen sharply since the start of the year, and UBS calls the surprise the biggest of the cycle. AI investment continues to show encouraging monetisation, with strength broadening across sectors rather than concentrating in a narrow group of names.
Fed policy as the clearest tailwind
Markets are still pricing in more than one Fed hike over the next year, but a recent run of softer payrolls, moderating inflation, and the retail sales drop has weakened the near-term case for tightening. UBS expects continued disinflation data to let the Fed extend its pause, which it sees as a further tailwind for risk assets. The bank expects volatility to pick up in the weeks ahead but keeps a constructive outlook into year end, favouring broadly diversified equity exposure across sectors and regions.
Source: Investinglive
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