Stocks should rebound after a rough September as investors realize growth fears are overblown, UBS says

A stock trader claps at the end of trade at the New York Stock Exchange
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UBS said US and global stocks should rebound after a rough September, as investors realize growth fears are overblown.
Central banks are still supporting stocks and inflation should soon fade, UBS Global Wealth Management said in a note.
Other investment banks have become more bearish about stocks and are predicting slower growth for the rest of the year.
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US and global stocks should rebound after a rough September as investors realize that concerns about a growth slowdown and a sustained pick-up in inflation are overblown, according to UBS Global Wealth Management.

Central bank policy is still supportive for economic growth, and inflation should fade away over the next year, UBS GWM chief investment officer Mark Haefele said in a note Monday. Those factors should help the rally in stocks to resume, he said.

Major US and global stock markets hit all-time highs in early September. But they ran into trouble later in the month as a number of worries came to the fore, including concerns that central banks would soon start cutting support for economies in response to strong inflation readings. The S&P 500 fell 4.8% in September, the biggest monthly decline since March 2020.

A number of investment banks, such as Deutsche and RBC, have turned gloomy about stocks over the last month and predicted slower growth for the rest of the year.

But UBS GWM struck a more upbeat tone on Monday, with Haefele saying: "We think … positive sentiment will return as recent headwinds abate, and the focus shifts back to the outlook for solid economic growth and strong earnings."

The key factor weighing on equities in September was a sharp rise in bond yields, largely driven by expectations that central banks such as the Federal Reserve would cut back on their purchases of securities. Rising bond yields make stocks - especially tech stocks whose full earnings potential lies far in the future - appear less attractive as an investment.

Yet UBS said rising bond yields shouldn't pose a threat to stocks over the coming months. The bank said investors should appreciate that higher yields are largely a reflection of positive economic news, rather than a reaction to strong inflation.

The bank's wealth management arm said equities can continue to rise, even as it predicted the yield on the key 10-year US Treasury note is likely to climb to 1.8% by the end of the year. It stood at 1.495% on Monday.

Inflation has risen to its highest in more than 10 years in the US and Europe, as snarled-up supply chains fail to meet demand and energy prices soar. That has worried many investors, as price rises eat away at the value of companies' earnings.

But UBS said it expects inflation to cool over the coming year, saying: "We think the recent rapid gain in fossil fuels is due to transitory factors."

It also stressed that central-bank policy remains supportive to growth, with the US Federal Reserve set to tighten monetary policy only gradually.

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