(06 JULY 2019)DAILY MARKET BRIEF 1:How to position within US equities

Despite a setback in May, the S&P 500 is up nearly 20% year-to-date heading into the July 4 holiday. After notching up all-time highs on both Monday and Tuesday, the index closed Wednesday's shortened trading session at a new record of 2,996 points. The Dow and the Nasdaq also set fresh records.

CIO is overweight US equities in its global tactical asset allocation, based on its expectation of superior profit growth in the US versus other regions: 3% in 2019, picking up to 7% in 2020 as headwinds from commodity prices and the tech sector abate.

In an environment of heightened uncertainty over global trade, CIO expects US equities to be more resilient than those elsewhere (the Eurozone, for example), thanks in part to a fairly defensive sector structure. "The Federal Reserve (Fed) also has more scope to stimulate the economy - reduce interest rates - than other central banks, and the federal government is more willing to increase budget deficits," writes CIO analyst Rolf Ganter in the UBS Equity Compass.

How should investors position within US equities? Sector-wise, CIO is overweight communication services and consumer discretionary. The latter was recently upgraded to a moderate overweight (from neutral), as CIO expects labor market gains and low mortgage rates to underpin consumer spending and housing activity.

By contrast, CIO is underweight US industrials and REITs. "In light of its outperformance this year, we reduced real estate to a moderate underweight from neutral," Ganter explains. "Valuations for the sector look stretched to us." CIO recently downgraded US financials to neutral (from a moderate overweight), citing the increasing likelihood of a Fed rate cut, which would make the US financial sector less attractive.

Within US equities, CIO remains neutral across size segments. "While valuations for small caps and mid-caps are relatively more attractive, their earnings growth is lagging," says Ganter. "The slowdown in global economic growth is disproportionately affecting smaller companies, which tend to be more economically sensitive." CIO also advises investors to stay neutrally allocated across growth and value styles.

For full details of CIO's stock selections within US equities, please see the respective Equity Preferences List.

Investors looking for topical stock ideas in global equities may also wish to consider CIO's Equity Radar topic, "US preferred to Eurozone". Here CIO highlights a select group of US stocks (among its Most Preferred) as well as a group of its lowest-conviction Eurozone stocks (Least Preferred).

By UBS