Investment Guide in the Fog of Policy: UBS Predicts Fed Rate Cut in September, S&P Aiming for 6200 Points by Year-End

According to Zhitong Finance APP, recently, the market focus has been consistently on U.S. policy developments—from the debate over the "Inflation Reduction Act" to U.S. involvement in the Israel-Hamas conflict. As the 90-day tariff suspension period is about to end, the policy focus in the coming weeks will shift to tariff decisions: whether to continue extending the suspension period or impose tariffs on countries that have not reached an agreement.

However, UBS believes that despite policy uncertainty dominating recent market fluctuations, the focus will gradually shift to macroeconomic data, particularly the actual evolution of economic growth and inflation paths.

UBS expects U.S. economic growth to slow down but not fall into recession. As inflationary pressures gradually pass through to end consumers, consumer spending will moderately contract, thereby suppressing growth. In the coming months, the impact of tariffs on inflation data will begin to manifest. Considering the lag in price transmission and consumer response, economic growth may further weaken by the end of this year.

Regarding Federal Reserve policy, UBS expects interest rate cuts to materialize in September. FOMC members generally believe that inflation caused by tariffs is a one-time shock and will not form a sustained upward trend. Based on this judgment and expectations of slowing economic growth, the bank predicts that the Federal Reserve will cut rates by 25 basis points at each of the next four meetings starting in September. This is based on the assumption that despite market fluctuations triggered by tariff issues, the effective tariff rate will ultimately stabilize at the current level of 15%—a rate that is not sufficient to trigger an economic recession.

As the policy outlook becomes clearer, coupled with investors beginning to digest favorable policies such as the budget reconciliation bill extending personal tax cuts and corporate tax incentives, market volatility is expected to gradually return to normal in the coming months. In this context, UBS advises investors to guard against short-term fluctuations while also preparing for upward opportunities in 2026.

In terms of investment strategy, UBS recommends:

Continue to allocate gold to hedge against political risks. Sudden news may trigger rapid sell-offs of risk assets, highlighting the value of safe-haven assets;

Invest in high-quality fixed-income products. Agency MBS and investment-grade corporate bonds can provide substantial returns while effectively hedging against stock market volatility;

Long-term investors can consider buying into the stock market on dips. Once the tariff situation clarifies, the Federal Reserve begins its rate-cutting cycle, and the market starts pricing in profit growth for 2026, the stock market will regain support—UBS expects the S&P 500 index to continue fluctuating but gradually rise to 6,200 points by the end of 2025. EPS is expected to grow by 6% to $265 in 2024, with further growth of 8% in 2026, targeting 6,500 points by June 2026.

In terms of sector allocation, UBS holds a neutral stance on value and growth sectors. This month, it upgraded the financial sector to an "attractive" rating, as it will benefit from regulatory easing and capital returns after stress tests. It also maintains an "attractive" rating for communication services, healthcare, utilities, and information technology for the following reasons:

Communication Services: Strong growth in digital advertising and a surge in AI applications create a dual driving force;

Healthcare: Increased policy certainty + valuation advantages + potential for profit growth;

Technology Sector: AI will become a core growth engine in the coming years, particularly favoring investment opportunities in the foundational layer of the value chain;

Utilities: Notable defensive attributes, performing relatively steadily during economic slowdowns