The recent report from UBS draws attention to the enduring strength and potential growth of the U.Sstock 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.Sstock market will prevail, allowing for further upward movement.

The new U.Sgovernment is preparing to impose a 25% tariff on imports from Canada and Mexico related to the issues of fentanyl and immigration starting next month

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This 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 Texas

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UBS 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 profitsSeveral 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.Seconomy appears to be on an upward expansion cycle, coinciding with the Federal Reserve's initiation of a monetary policy easing process

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This 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.Stariffs are not anticipated to impede the further easing of inflationThis judgment hinges on the intrinsic structure of the U.Seconomy and the market's self-adjusting capabilitiesWith a gradual recovery in the global economy, domestic consumer demand within the U.Sis on the rise, and corporate production efficiencies are improving, partially mitigating the possible negative impacts from tariff measures

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Consequently, 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 marketHistorically, it has been observed that during non-recessionary periods, the Federal Reserve’s rate cuts generally yield favorable conditions for the stock market.

UBS informs investors to keep in mind that despite the uncertainty surrounding the new administration's next moves and a prevailing sense of caution within the market, it is crucial not to become blinded by unknown risks that could overshadow the firm fundamentals supporting the U.Sstock marketAs a key engine of the global economy, the United States boasts a solid economic foundation marked by growing investments in technology research and development

Innovations in cutting-edge sectors such as artificial intelligence and biotechnology continue to fuel economic dynamismAdditionally, consumer markets are gradually recovering, buoyed by steadily rising consumer confidence indices and increasing purchasing power—factors that collectively reinforce a stable development outlook for the U.Sstock market.

On the investment strategy front, UBS advocates for a cautious yet optimistic stance, maintaining a firm outlook on technology stocks, utility stocks, and financial stocks without leaning towards any singular viewpointTechnology stocks, with their powerful innovative capabilities and accurate grasp of future trends, are positioned to dominate in the global technology race, potentially delivering substantial returns for investorsUtility stocks, known for their stable cash flows and comparatively lower risks, consistently function as the backbone of diversified portfolios