UBS strategists warn of potential stock market bubble as interest rate cuts could go further than expected

According to ChainCatcher, UBS strategists believe there is a significant risk that US interest rates will ultimately fall further than the market is currently pricing in, potentially inflating a stock market bubble.

Andrew Garthwaite, who leads the UBS team, stated that since 1981, every Fed policy easing cycle that started with a 50 basis point cut was accompanied by a recession. However, this time, they believe it is a sign of Fed aggression rather than an impending recession.

Garthwaite pointed out that the market pricing reflects interest rates bottoming out at around 2.8%, a level the Fed has previously hinted at as being neutral. “Therefore, there is a clear risk that rates will eventually fall further than expected,” he said.

The UBS team believes that the steepening yield curve, driven by short-term bonds, favors defensive stocks and consumer goods industries, excluding luxury goods. They expect small-cap stocks to outperform as their floating rate debt is three times that of large-cap stocks.