Wall Street’s Fear Gauge Is Flashing Buy Sign, UBS Wealth CIO Says

(Bloomberg) — As traders rattled by this week’s equities cascade ponder what lies ahead, UBS Group AG’s Solita Marcelli remains confident US stocks will continue their upward trajectory in the coming months.
The chief investment officer of the bank’s wealth management arm said recent market gyrations haven’t dented her fundamental view on stocks for 2024. The Federal Reserve’s first interest-rate cut lies ahead and in times of a solid growth backdrop, the S&P 500 Index has risen roughly 17% on average over the next 12 months after the US central bank starts easing, she noted.
“Because of this, I think the markets can be supported,” Marcelli said in an interview. “There are also some contrarian buy signals that are emerging.”
The brief surge in the Cboe Volatility Index, or VIX, to multi-year highs earlier this week was an opportunity for traders — especially those with cash on the sidelines — to buy into the market, she added, indicating that above-average US stock returns have typically followed spikes in Wall Street’s fear gauge in the subsequent three-, six-, and 12-months. “Some volatility will be with us, but I think there’s some decent upside left here,” Marcelli said.
US stocks posted big gains on Thursday after data showed weekly jobless claims fell by the most in a year, quelling worries a steeper slowdown is ahead for the world’s largest economy after disappointing labor market data last week. The S&P 500 soared some 2% in the afternoon session, on pace for its best day since February.
Marcelli said UBS Wealth has been advising clients to maintain their full allocation to US equities against the latest market swings, citing four key factors that underpin a supportive backdrop: healthy earnings growth, artificial-intelligence investment, a disinflationary environment with stickier inputs like shelter finally cooling, and imminent monetary easing by the Fed.
Even as investors this quarter have fretted over companies’ heavy AI spending, the CIO — who was a former tech analyst at Credit Suisse in the early 2000s — still says the risk of doling out too much cash is “dwarfed by the risk of missing out” on the transformative potential of AI and what the team at UBS estimates will be a more than trillion-dollar market in the coming years.
The firm sees opportunity in quality stocks with strong balance sheets, many of which are in the technology sector; companies that would benefit from a pickup in housing activity including areas like home improvement, insurance, and building materials; and some emerging markets for investors with a long-term time horizon. If the Eurozone avoids a recession, she also says small- and mid-cap companies there will fare better than those in the US, given policy easing has already commenced in the region. 
UBS Wealth’s latest S&P 500 year-end target was raised in mid-July by head of US equities David Lefkowitz to 5,900, implying a roughly 11% gain from Thursday’s levels. The strategist has also said the Fed cutting rates into an investment and innovation boom could further stoke animal spirits and drive the gauge as high as 6,200 before 2024 ends. 
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