US Equity Strategy: Simply U.S.A. - Stagflation Probability Rising
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UBS reports that the probability of stagflation has risen to 27%, accompanied by a recession probability of approximately 25%. Utilizing the firm's REVS framework, which evaluates regimes, earnings revisions, valuations, and sentiment, the Energy sector has surged to the top of the industry scorecard due to highly positive earnings revisions. Communication Services, Consumer Staples, and Utilities follow closely, reinforcing defensive positioning.
The S&P 500 valuation has contracted to approximately 19x, approaching the proxy level for the discount rate. Should the optimistic growth narrative continue to fade, valuations could compress by an additional 0.5 to 0.8 turns. In a scenario where oil supply disruptions persist for two months, the S&P 500 could correct to around 6,000 points. A prolonged disruption might trigger a deeper decline to approximately 5,350 points, coinciding with a recession.
Conversely, a swift resolution could propel the index to 7,150 points by year-end. Within thematic exposures, AI semiconductors and AI robotics continue to dominate the rankings. The report identifies vulnerable sectors, noting that building materials and professional services exhibit deeply negative earnings scores. Top-ranked individual stocks highlighted include Sensata Technologies, Exelon, and Alphabet, whereas Ares Management, PayPal, and Caesars Entertainment rank near the bottom.