The recent report from UBS draws attention to the enduring strength and potential growth of the U.S. stock marketDespite a few fluctuations recently, the fundamentals that support this market remain robustInvestors are encouraged to stay vigilant regarding the future policies of the new government while not losing sight of the underlying positive aspects that continue to bolster the American financial landscape.

UBS anticipates that market volatility is likely as responses are triggered by significant announcements from the new administrationThere are concerns about proposed tariffs that could negatively affect targeted regions if implementedHowever, UBS holds a strong belief that the growth momentum within the U.S. stock market will prevail, allowing for further upward movement.

The new U.S. government is preparing to impose a 25% tariff on imports from Canada and Mexico related to the issues of fentanyl and immigration starting next monthThis statement was made by the President, who also mentioned the possibility of a 10% tariff on products imported from China, effective from February 1. Given the region's trade surplus with the United States, the European Union is also flagged to be affected by these tariffs.

Apart from tariff implications, UBS points out that investments in artificial intelligence (AI) will continue to be a growth engine for the economy in the coming yearsAlong with the tariff plans targeting China and the EU, the new government recently unveiled a private sector investment scheme that could potentially reach $500 billion to fund AI infrastructure development, spearheaded by a collaboration among OpenAI, SoftBank, and Oracle’s joint venture StargateMasayoshi Son from Softbank indicated that this consortium plans to deploy $100 billion immediately, while Larry Ellison, Oracle’s chairman, reported that the first data center for this project is currently under construction in TexasUBS sees this as a significant catalyst for advancing the AI growth narrative.

Moreover, UBS anticipates that the current earnings season will set an optimistic tone for corporate profits

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Several leading technology companies are scheduled to release their fourth-quarter results next week, which could lead to upward revisions in capital expendituresUBS also expects a narrowing gap between AI-related revenues and capital expenditures, which could drive large tech companies to achieve a 25% profit growth by the fourth quarter of 2024. In a broader context, with economic growth exhibiting resilience, the S&P 500 index is projected to see a 7-9% profit increase over the three months ending in DecemberBy 2025, a 9% profit growth could propel the S&P 500 index to a year-end target of 6,600 points.

The trajectory of the U.S. economy appears to be on an upward expansion cycle, coinciding with the Federal Reserve's initiation of a monetary policy easing processThis shift is expected to provide a substantial boost to economic development and has already instilled numerous positive signals within financial marketsFollowing last week's release of inflation data that came in softer than anticipated, the financial markets reacted strongly, resulting in a significant drop in the yield on 10-year U.STreasury bonds, which has plummeted by over 20 basis pointsIn UBS’s baseline scenario, based on a variety of economic data and market dynamics, the U.S. tariffs are not anticipated to impede the further easing of inflationThis judgment hinges on the intrinsic structure of the U.S. economy and the market's self-adjusting capabilitiesWith a gradual recovery in the global economy, domestic consumer demand within the U.S. is on the rise, and corporate production efficiencies are improving, partially mitigating the possible negative impacts from tariff measuresConsequently, against the backdrop of persistently moderate inflation, it is expected that the Federal Reserve will make further adjustments to its monetary policy, likely lowering policy rates by another 50 basis pointsThis may result in the 10-year U.STreasury yield dropping to around 4%, creating new investment opportunities in the bond market

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