The CEO Macro Briefing Book
The CEO Macro Briefing Book
The CEO Macro Briefing Book
April 2024 This report has been prepared by UBS Financial Services Inc.
Please see the important disclaimer at the end of the document.
Table of contents
Section 7 Appendix 65
Executive Summary: Higher for longer, for good and bad for markets
• Higher growth, inflation, and rates is the story of the US economy. Growth and inflation exceeded
expectations in Q1, and while moderation is still the most likely path for both, the declines should be gradual.
Disinflation will be bumpy, but inflation reacceleration is unlikely barring major supply disruptions.
Macroeconomic
Outlook • No compelling reason for rate cuts any time soon, but that’s still the Fed’s bias. The outlook is
asymmetric: the Fed likely stays on hold if the economy doesn’t cool, but it will cut if inflation declines, or the
labor market weakens. Market pricing is down to 1.5 cuts this year, the Fed’s (lagged) projection is 3, we expect
2 starting in September. The bar is very high for additional rate hikes; expected cuts have to be eliminated first.
• A virtuous cycle between consumer spending and the labor market, for now. Real income growth, rising
total wealth, a tight labor market, and improving sentiment are powering strong spending by households. Debt
Operating delinquencies are modestly rising, but still low overall. The labor market is getting back into balance, with fewer
job openings and quits, and slowing wage growth. Spending and job growth should stay healthy for a while.
Environment
• Financing conditions have modestly eased, but not to everyone’s benefit. Looser lending standards
alongside strong bond issuance have loosened financing conditions, and those trends should continue. But
larger companies are the main beneficiaries; higher-for-longer rates are more challenging for bank borrowers.
• Equity rally temporarily challenged by higher rates and geopolitical risk. The upward trend in stocks was
dented by delayed rate cut expectations and geopolitical risk, but those headwinds are likely to ease. Market
Markets & Deal performance did broaden out as breadth increased, and the Magnificent 7 are no longer leading the way.
Activity • M&A and IPO green-shoots threatened by “higher for longer” narrative. Early signs of recovery in Q1
faded after rates rose and expected cuts got priced out. IPO after-market performance also underwhelmed. This
activity, along with PE and VC deal making, likely to take longer to pick up with the shift in the rate outlook.
• 2020 rematch confirmed, investor interest on the back burner until Labor Day. With a Trump vs. Biden
rematch almost certain, the focus has pivoted to potential policies under different scenarios. Without a one-
Politics party sweep of all branches the policy implications are likely to matter more for sectors than the economy.
• For all the talk of de-globalization, USD dominance should remain. High debt and deficits and a shift to a
multi-polar world has led to predictions for the USD’s demise as the global reserve currency. But US growth
exceptionalism, the lack of alternatives, and inertia should ensure USD dominance for the foreseeable future.
2
Dashboard Summary: As the macro cools, rates and activity will follow
Expected Current 6-months prior
2% 2% 2.5% 3.5%
3.5%
Macroeconomic
Conditions
Deep Strong Below Above Below Above Below Above
Recession Expansion 1.5% 2.5% Neutral Neutral 3% 4%
Operating
Environment
Bullish Value, rhs Deal Count, lhs Volume, rhs Deal Count, lhs
1/23 7/23 1/24 1/23 7/23 1/24 1/19 1/21 1/23 3/19 3/21 3/23
3
Markets Dashboard: From great to still good performance
Performance Latest YTD Q124 H223 2023 2024 UBS CIO Forecasts
S&P 500 5011 4.1% 10.2% 7.2% 24.2%
S&P 500 ACWI
Large Cap Growth 3232 5.6% 12.6% 6.6% 28.3%
Large Cap Value 1773 2.4% 7.4% 7.9% 19.8%
US Small Cap 1967 -3.9% 4.8% 7.3% 15.1% 5,200 940
Int'l Developed Markets 911 4.0% 9.1% 5.9% 19.5%
S&P 500 Sectors
Energy 731 13.4% 12.7% 2.6% -4.8%
Materials 561 3.8% 8.4% 3.4% 10.2%
Industrials 1027 5.7% 10.6% 6.2% 16.0%
Consumer Discretionary 1391 -2.5% 4.8% 6.6% 41.0%
Consumer Staples 802 4.2% 6.8% -2.1% -2.2%
Healthcare 1625 1.8% 8.4% 2.7% 0.3%
Financials 680 7.3% 12.0% 11.6% 9.9% Federal Funds Rate (%) 10Y Treasury Yield (%)
IT 3545 3.0% 12.5% 10.1% 56.4%
Utilities 335 3.2% 3.6% -3.3% -10.2%
5%
Real Estate 227 -10.6% -1.4% 6.3% 8.3%
3.5%
2,250 1.12
USD 106 4.8% 3.1% -1.5% -2.1%
EUR 1.07 -3.5% -2.3% 1.2% 3.1%
JPY 155 9.6% 7.3% -2.3% 7.6%
EM FX 1711 -1.7% -0.9% 3.8% 4.8%
Source: Bloomberg, UBS, as of 19 April 2024
Negative Positive
4
Section 2
Macroeconomic outlook
5
Macro Key Points: Higher for longer for everything
Growth has been durable, inflation sticky; slowdowns are likely to be gradual from here.
The latest reacceleration in payrolls and inflation data underscores strong momentum in 2H23
continued into 2024. Healthy consumers and a strong labor market are the underpinnings of this
momentum. A potential stress point is with small businesses that are more rate sensitive.
Fed rate cuts delayed not derailed; very high bar for more rate hikes. The March’s FOMC
projections were stale after just a month. Economic strength doesn’t warrant cuts right now, which is
the most recent message from Fed officials. Slower wage growth and modest rent growth drives our
confidence in further disinflation that can justify the first cut in September.
6% may be the new 4% for US nominal GDP growth … a “Roaring ’20s” by another name.
The combination of real GDP growth plus inflation may stay close to 6% for the foreseeable future, a
level it has surpassed since 2021. This compares to 4% in the 2010s, but similar to 1990s levels.
US growth exceptionalism continues, now impacting central bank policy. The gap in growth
remains wide between the US and other developed markets, although the latter are stabilizing. While
Fed rate cuts are delayed, other major central banks are poised to start decreasing rates in Q2.
6
Macro Dashboard: On cooling path, but slower than expected
Expected Current 6-months prior
2% 2% 2.5% 3.5%
7
Growth: Not much indication yet of a slowing economy
Rather than slowing, expectations for 2024 growth has been continually revised higher, for good reason.
Private sector demand (ex-government spending and net exports) has accelerated over the past year.
Private sector demand has accelerated the past year Expectations for 2024 growth have become more positive
Final sales to private domestic purchasers, q/q annualized, in % GDP y/y, in %
Q1 24
Forecast
Source: BEA, Federal Reserve, UBS, as of 23 April 2024 Source: Bloomberg, UBS, as of 23 April 2024
8
Growth: Tentative signs of recovery in rate sensitive sectors
The manufacturing sector is starting to recover after a mild contraction, albeit at a gradual pace. The
housing market is off its bottom, but the recovery is being hampered by the rate rise.
Manufacturing activity is clearly off its recent lows The housing market is improving in fits and starts
ISM manufacturing new orders index National Associate of Home Builders Market Index
Source: BEA, Federal Reserve, UBS, as of 23 April 2024 Source: Bloomberg, UBS, as of 23 April 2024
9
Growth: “No landing” or landing to a higher plateau?
Rather than trend to a soft landing of 4% nominal GDP growth (2% real plus 2% inflation), the economy
continues to grow around 6%. The economy may have “landed” at that level, the pre-GFC norm.
Growth has been flying above 2% trend for two years A 6% economy may be the old new normal
GDP growth, q/q annualized, in % Contribution to nominal GDP, y/y, %
7
Growth Inflation Overall
6.3
6 5.8
5
1.9
3% average since 3.7
4.0
Q3 2022 4
1.6
3
2 3.8
2.4 2.5
1
0
1992-2000 Average 2011-2019 Average 2023
Source: BEA, Federal Reserve, UBS, as of 23 April 2024 Source: BEA, Federal Reserve, UBS, as of 23 April 2024
10
Growth: Capex strong but moderating, higher rates are a headwind
While legislation like the CHIPS and IRA Acts created incentives for capital expenditures, “higher-for-
longer” rates and rising risks are both headwinds for future capex spending plans.
Strong non-residential fixed investment growth now slowing Firm surveys indicate capex slowdown ahead
year/year, % Index
Federal Reserve Regional Survey-
Capex Plans , 3M mov. avg., lhs
NFIB Capex
Plans, 3M
mov. avg., rhs
Source: BEA, Federal Reserve, UBS, as of 23 April 2024 Source: NFIB, Federal Reserve, UBS, as of 23 April 2024
11
Firms: Small businesses are being squeezed more than larger peers
Higher cost of capital is having a disproportionately negative effect on small businesses; larger cash-rich
companies are less sensitive to higher rates thanks to access to cheaper public market capital.
Smaller firms more interest-rate sensitive than larger peers And higher rate environment weighing down smaller firms
Estimated share of variable rate debt by business size, % Confidence indices
60
50 CEO 1Y
ahead
outlook, rhs
40
30
20
10 NFIB Small
Business
outlook, lhs
0
Small Large
Source: CEO Magazine, NFIB, UBS as of 22 April 2022 Source: Goldman Sachs, UBS as of 22 April 2022
12
Inflation: Hot Q1 CPI are likely speedbumps in the disinflation trend
Inflation in Q1 exceeded market expectations and pushed out the timing of expected rate cuts. But
disinflation is likely resume, partly because wage growth continues to soften.
Hot CPI prints are largely due to services But continued wage disinflation points to “soft landing”
CPI inflation contribution, y/y, % y/y, %
Goods Services Average Hourly
Supply Earnings
chain-
related
spike
Duke
CFO
survey
Services
NFIB Goods
Survey
Source: BEA, UBS as of 23 April 2024 Source: BEA, UBS as of 23 April 2024
13
Inflation: Shelter inflation should also ease, and overall inflation with it
Core CPI inflation is reasonable (2.4% y/y) when shelter inflation is excluded, versus 3.8% otherwise.
Plus, real time rent growth measures suggest shelter inflation will continue to moderate.
Shelter CPI keeping headline elevated Different measures of shelter inflation show significant cooling
CPI inflation, y/y, % CPI inflation, y/y, %
CPI Shelter
Core CPI
New shelter
series
Core CPI
less shelter
Source: BEA, UBS as of 23 April 2024 Source: BEA, UBS as of 23 April 2024
Source: BLS, UBS, as of 23 April 2024 Source: BLS, UBS, as of 23 April 2024
14
Interest rates: Cuts are delayed not derailed; the Fed is biased to ease
Market pricing for rate cuts in 2024 has gone from nearly 7 in January to about 1.5 now, and the Fed
forecasts 3 cuts. The Fed can stay on hold if inflation is sticky but cut on soft labor or inflation data.
Markets pare down rate cut expectations after hot CPI print A higher neutral rate is pushing up the 10-year yield
% %
5.0
Federal Reserve
Effective Policy rate
4.5
4.0
3.5
3.0
Pricing as of 4/15
Pricing as of 2/1 Market-implied neutral Fed funds rate
10y Tsy yield
2.5
2023 2024
Source: BEA, UBS, as of 23 April 2024 Source: BEA, UBS, as of 23 April 2024
15
Global: Signs of a manufacturing recovery, but only the Fed is on hold
Global manufacturing activity is showing signs of expansion in 2024. But that’s not enough to keep ex-
US central banks from starting rate cuts in Q2—another case of US exceptionalism.
Global Manufacturing cycle seems to be turning Higher for longer mainly a US story supported
PMI Manufacturing Index Market pricing for a June 2024 rate cut, %
100%
80%
60%
40%
20%
Contraction
0%
US EU
15-Feb Today
Source: ISM, UBS, as of 23 April 2024 Source: Bloomberg, UBS, as of 23 April 2024
16
Section 3
Operating environment
17
Operating environment dashboard
Bad Good
Current Prior
18
Consumer Key Points: Still spending on rising income and sentiment
Consumer
Consumer
Consumer -2Y
-2Y
Today
Indicator -2YToday Today
Today
-2Y
Today
-1Y
Spending
Spending
Spending
Income
Income
Income Household purchases centered on services. Goods spending
Wealth
Wealth
Wealth
benefitted from a lockdown environment, now rotating back to services.
Wealth
Debt
Daycare, professional services, and tourism are among category leaders.
Debt
Debt
Debt
Delinquen
Delinquency
Delinquency
Delinquency
cy
Sentiment
Sentiment
Sentiment
19
Spending: Very robust according to micro and macro data
Retail sales accelerated late in the winter and consumer spending is running higher than its pre-
pandemic trend would have predicted.
Retail sales shows spending on an upswing Real consumption running above trend despite pandemic
in 2021 bil. US$ in 2017 tril. US$
Nominal
+10%
Real
Source: BEA, UBS, as of 23 April 2024 Source: BEA, UBS, as of 23 April 2024
20
Spending: Goods spending still above trend, services catching up
The post-pandemic spending mix appears structurally different: work at home has driven goods spending
significantly higher, while daycare, education, and tourism are booming within services.
Services spending now marginally above trend in real terms With a large variance for services spending
Real good and services spending, relative to 2018-2019 % Real good and services spending, relative to 2010-2019 %
Daycare
Goods Professional services
Education
Tourism
Financial Services
Services Housing
Services
Food Services
Gambling
Goods Live Events
Accomodation
Services
Transportation Services
Recreation Services
Insurance
Haircuts
21
Income: Consumer spending powered by stronger balance sheets
Consumption has helped drive growth surprises; a broad lift in net worth (up nearly USD 5 tr in 4Q23) as
well as continued positive real income growth should power consumption going forward.
The median American’s net worth +46% since 2019 Personal income higher thanks to pandemic stimulus
Net worth by quintile, 12/31/2019=100 in tril. USD
Start of
recession
2018-2019
GFC Pre-pandemic trend
Source: Federal Reserve Bank, UBS, as of 23 April 2024 Source: Federal Reserve Bank of Atlanta, UBS, as of 23 April 2024
22
Balance Sheets: Debt burden is not nearly as onerous as assumed
The delinquency rate for credit card debt is rising, while delinquent mortgages, a far larger share of all
household debt, remain at historical lows. Debt burdens are very manageable, even with higher rates.
Overall debt delinquency rate still low versus history Rising stress in credit card debt for lower incomes
Delinquency rate for consumers, all debt, in % Delinquency rate for consumers, %
Income
<50K
Total
Income
Credit
50k -100k
Cards
Income
>150K
Source: Bloomberg, UBS, as of 23 April 2024 Source: Bloomberg, UBS, as of 23 April 2024
23
Sentiment: Firming disinflation expectations driving sentiment higher
Consumer sentiment is rebounded and is now at levels comparable to the early post-GFC cycle.
Sentiment has correlated highly with inflation, and further improvement likely requires more disinflation.
Consumer sentiment rising as inflation expectations decline Optimism rising faster for higher income earners
Index % U. Michigan sentiment index by income
Source: University of Michigan, UBS, as of 23 April 2024 Source: University of Michigan, UBS, as of 23 April 2024
24
Labor Key Points: Getting back in balance, but still historically robust
UER
Unemployment
Payrolls
Payrolls Immigration a boon for labor supply. Revisions to immigration data
Openings
Openings
for the last few years reveal millions more than assumed suggesting
continued strong job growth possible, especially for lower-skilled jobs.
Participation
Participation
Wages
Wages
Part time work has increased. The number of workers taking on part-
time roles for non-economic reasons has increased; representing a
greater emphasis on post-pandemic “work/life” balance.
25
Labor Demand: Cooling without cracking
White hot demand for jobs has significantly retreated from 2022 peaks without a sharp rise in
unemployment, yet employees are increasingly more worried about keeping their jobs.
Job vacancies declining as # of unemployed remains steady Hiring plans cool giving anxiety to existing workers
in millions 1Q mov. avg., %
Job vacancies Small business
cooled from hiring pans Strong
peak… cool … Demand
-27%
…and
consumer
job loss
…while fears rise
unemployment
remains steady
Weak Cooling
Demand Demand
Source: BLS, UBS, as of 23 April 2024 Source: BLS, UBS, as of 23 April 2024
26
Labor Demand: Number of laid-off workers still very low
Layoffs announcements reported in the financial press can seem worrying, but actual job cuts and
unemployed persons are at historically low levels.
Job cut announcements moving higher But actual layoffs still at record lows
in ‘000s Jobless claims & Layoff rate
Strong
Demand
-27%
Weak Cooling
Demand Demand
Source: Challenger, Gray, and Christmas, UBS, as of 23 April 2024 Note: Axes have been truncated
Source: BLS, UBS, as of 23 April 2024
27
Wages: Smaller increases, but still too high for the Fed
After peaking in summer 2022 wage growth is clearly, slowing which is a likely precursor to a sustained
slowdown in core CPI.
Atlanta Fed Median Wage Tracker Slower wage growth consistent with further disinflation
year/year, % year/year,% 2017-Present
Faster
April 2022
Q4 2023
April 2021
Faster
Source: Federal Reserve Bank of Atlanta, UBS as of 23 April 2024 Source: BLS, UBS as of 23 April 2024
28
Labor Supply: Fewer people quitting, more choosing part-time work
Part of the cooling labor demand is economic – the wage premium for job switchers has sharply declined
limiting the quits rate; increased desire for work/life balance driving part-time jobs higher.
Wage premium for switching jobs is declining Rise in part time workers most due to non-economic reasons
% % total employed
Part time for non-
economic reasons, rhs
Quits rate
Source: BLS, UBS, as of 23 April 2024 Source: BLS, UBS, as of 23 April 2024
29
Labor Supply: An immigration surge helped fill the labor shortfall
Higher-than-expected immigration eases labor shortage concerns and wage pressures, especially since
immigrants are likelier to work than native born.
Revised immigration estimate shows surge in immigration Immigrants more likely to be working than native born
Millions of persons Participation rate, %
3.5 Previous
Previous Forecast
Net immigration
Forecast
3.0
2.5
~2 million more immigrants
than expected
2.0
1.5
1.0
0.5
0.0
2010 2015 2020 2025 2030 2035 2040 2045 2050
Source: Census Bureau, UBS, as of 23 April 2024 Source: BLS, UBS, as of 23 April 2024
30
Financing Key Points: Conditions to ease, but not uniformly for all
Bad Good
Financing heatmap
Financing -2Y Today
31
Standards: Tight, especially for small firms, but starting to loosen
Lending standards loosen significantly for small and large firms as banking stress abates; still many small
firms complain that financing is still difficult.
Banks are still tightening standards for loans, but easing now Small firms are still saying loans are hard to get
Senior Loan Officer Survey, tighter standards % NFIB survey: availability of loans index
Tighter
conditions Investment
grade, lhs
Source: Bloomberg, UBS, as of 23 April 2024 Source: Bloomberg, UBS, as of 23 April 2024
32
Cost: Spreads are tight and issuance rising for corporate bonds
Strong capital markets and a rise in foreign demand help, and expected rate cuts are tailwinds for the
corporate bond market; few signs of distress amid higher geopolitical risk.
IG and HY spreads show no signs of distress Issuance has picked up particularly for high yield
OAS, % 6M mov. avg., bil. US$
250 60
50
200 Investment grade, lhs
High yield, rhs
40
150
30
100
20
50
10
0 0
2010 2012 2014 2016 2018 2020 2022 2024
Source: Bloomberg, UBS, as of 23 April 2024 Source: Bloomberg, UBS, as of 23 April 2024
33
Availability: Refinancing activity surges even without rate cuts
“Higher for longer” rates may crimp further activity while larger firms with access to capital markets
ramp-up refinancing activity.
“Higher for longer” rates will hurt small business financing Bond issuance for large companies accelerating esp. refinancing
% 1Y MA, bil. US$
100
90
Satisfied borrowing 80
needs
70
60
50
40
30
20
10 "New Money"
Refinancing
0
Jun-21 Dec-21 Jun-22 Dec-22 Jun-23 Dec-23
Source: NFIB, UBS, as of 23 April 2024 Source: SIFMA, UBS, as of 23 April 2024
34
Real Estate Key Points: Green shoots derailed by higher rates
Residential
Activity
Residential
Prices
Residential
Vacancy
Sales and starts are mixed. Lower mortgage rates were tailwind for
Commercial
sales, before “higher-for-longer” narrative took hold of the market.
Activity New starts have fallen from post-pandemic peaks.
Commercial
Prices
Commercial
Vacancy
35
Residential: Sellers kept on the sidelines despite record-tight inventory
Record low housing inventory is keeping prices elevated, while gap between new and existing mortgages
prevent more seller listings.
Housing inventory is near the lowest levels on record Gap between new and existing mortgage rates very wide
in millions %
New Existing
Home loans
Sales (rhs)
Source: BEA, UBS, as of 23 April 2024 Source: Federal Reserve, UBS, as of 23 April 2024
36
Residential: Expectations of rate cuts a tailwind to residential housing
New and existing home sales had inflected higher alongside new home starts as the market had become
confident of rate cuts happening later this year, but higher rates put the recovery at risk.
Decline in home sales may have already bottomed Homes starts cool as rate cut expectations are pushed out
in tsds. in millions
Existing
home
sales (lhs)
New
Home
Sales (rhs)
Source: BEA, UBS, as of 23 April 2024 Source: Federal Reserve, UBS, as of 23 April 2024
37
Commercial: Risks of a meltdown are exaggerated
Office properties are seeing stress due to much lower vacancy rates and prices, but this segment of
commercial real estate (CRE) occupies less than a fifth of the overall CRE value.
Office prices challenged by higher rates and “work from home” Value of office space < 16% total
$ per square foot % Total Commercial Property Value
16.4% 18.4%
15.5%
24.2%
14.0%
11.6%
Source: Real Capital Anlytics, UBS, as of 23 April 2024 Source: MSCI, UBS as of 1 February 2024
38
Section 4
39
Politics: Polls have narrowed, betting markets see divided government
The polling gap between Biden and Trump has narrowed, indicating a toss-up. Prediction markets still
favor Democrats gaining the House, while Republicans are slight favorites set to retake the Senate.
It’s essentially tied in polls Market odds on 2024 House / Senate outcomes
2024 Presidential polling average,% %
80
70
60
50
40
30
20
Nov-23 Dec-23 Jan-24
R-Senate D-Senate R - House D - House
Source: Real Clear Politics, UBS, as of 23 April 2024 Source: UBS, as of 15 January 2024
40
Politics: Legislative priorities under different electoral outcomes (I/II)
Blue Sweep Biden / GOP Senate / Dem House Red Sweep Trump / GOP Senate / Dem House
• Taxes increases for higher • Marginal tax rate higher • Lower marginal tax rates • Marginal tax rate higher for
earnings, capital gains, made permanent. top brackets.
• No change for capital gains
corporates.
nor corporate tax. • Corporate tax decrease • Estate tax compromises.
possible.
• No change to corp. tax.
• Greater regulatory oversight. • Greater regulatory oversight. • Less regulatory oversight • Less regulatory oversight
especially for energy / especially for energy /
Policies
• Stricter scrutiny for M&A and • Stricter scrutiny for M&A and
financials. financials.
anti-trust violations anti-trust violations
• Reduced scrutiny of M&A. • Reduced scrutiny of M&A.
• IRA to remain in place. • Existing tariffs to remain in • Partial rollback of IRA • New and universal tariffs
place with China exception. incentives. possible, especially on China.
• Existing tariffs to remain in
place with China exception. • New and universal tariffs
possible, especially on China.
• Macro impact likely to be • Smaller impact in than blue • Overall positive macro impact • Less impact than red sweep
smaller than Biden’s first term. sweep scenario . alongside inflationary scenario.
Macro impact
pressure.
• Taxes would rise for higher-
income HHs – disinflationary • Fewer Fed rate cuts
• Should lead to more rate cuts. • Higher deficits and trade
tensions.
• Slightly negative for USD
41
Politics: Sector impact may not need legislation, differences matter (II/II)
Blue Sweep Biden / GOP Senate / Dem House Red Sweep Trump / GOP Senate / Dem House
• Negative for fossil fuels. • Continued regulation for • Positive for fossil fuels; oil • Somewhat positive for fossil
fossil fuels. and gas investment could fuels with less regulatory
Energy
financials. company ideology would financial services. OCC, SEC leadership likely
remain in place. positive.
• New regulations and • More favorable regulatory
enactment of Credit Card environment could favor
competition likely. further consolidation.
• Continued regulatory • Limited ability pass new • Trump’s proposal for int’l • Limited bipartisan solutions.
Healthcare
• Continued support for • Continued support for • Increased semiconductor • Increased semiconductor
Technology
Share of USD in FX reserves worldwide USD used in international transactions jumped higher in 2024
% Total % Total
USD
EUR
CNY
Source: IMF, UBS, as of 23 April 2024 Source: SWIFT, UBS, as of 23 April 2024
43
USD: Despite challengers, USD dominance should persist indefinitely
Advantage Disadvantage
44
USD: If the dollar weakens, it may be only because it’s very expensive
USD DXY
index
10
Months
5 Months
2000-2020
Avg
2000-2020
Avg
USD REER
(inflation adjusted)
45
Section 5
46
Market Activity Key Points: A good start slowed by higher rates
April pullback is likely a pause that refreshes. Equities ended Q1 on a strong footing but stumbled
in April due to higher rates on the back of reduced rate cut expectations and Middle East tensions. Mag
7 performance is no longer dominant and now quite idiosyncratic as equity market breadth has
improved.
Market improvement doesn’t require rate cuts, just rate stability. From nearly seven rate cuts in
2024, market pricing is now less than two, with risk of additional rate hikes. Disinflation progress and
slower growth should lead to rates falling, or at least stop rising. Volatility likely continues until that
happens.
M&A and PE "green shoots" challenged by higher rates. Deal activity still muted and may stay that
way until there is more clarity on the path of rates. Broad market improvement—rising equities, tight
credit spreads, ample corporate bond issuance, and improving CEO sentiment—are all still generally
supportive of more M&A, but bid-ask spreads between buyers and sellers is wide.
IPO activity and VC funding remain tepid, and a real pick-up could take a while. A few large 1st
day “pops”, but subsequent IPO performance was underwhelming. Activity likely stays low until that
improves. VC funding skewed towards AI start-ups, but that is slowing as VCs assess potential winners
in the space. VC funding rounds starting to improve, but a full valuation re-set could be a hindrance.
47
Equities: A strong Q1, a volatile Q2 so far
S&P 500 and Nasdaq 100 were both up 10% in Q1, but gave up over half of that in early April. The sell-
off and market volatility stem from higher rates, geopolitical risks, and investors de-risking portfolios.
Q2 equity index returns reversing Q1 so far Equity and rate volatility has surged in April
Rebased, 12/31/2023=100 %
1 April 1 April
MOVE, lhs
S&P 500
Nasdaq 100
Russell 1000
VIX, rhs
Source: Bloomberg, UBS, as of 19 April 2024 Source: Bloomberg, UBS, as of 19 April 2024
48
Equities: A Magnificent 7 no more, but market breadth has widened
Two of the Magnificent 7 are down year-to-date, with wide return dispersion amongst them all. The
equity rally broadened in Q1, and that should continue as the year goes on.
Wide dispersion in Magnificent 7 year-to-date returns Market breadth continued to rise through March
Rebased, 12/31/2023=100 # of companies reaching new 52-week highs on US exchanges
Source: Bloomberg, UBS, as of 19 April 2024 Source: Bloomberg, UBS, as of 19 April 2024
49
Equities: The S&P 500 is expensive, but earnings keep rising
The S&P 500 is rich relative to its own history, but can grow into its valuation. Earnings growth is likely to
continue in a higher nominal GDP environment and could be up nearly 10% in both 2024 and 2025.
S&P 500 P/E is a standard deviation above its LT average Earnings expectations continue to grind higher
Forward P/E S&P 500 bottom-up consensus fwd. EPS estimate, $
255
S&P 500 more
Expensive 250
245
240
Average 235
230
225
220
2022 2023 2024
Source: Bloomberg, UBS, as of 19 April 2024 Source: Bloomberg, UBS, as of 19 April 2024
50
Rates: Higher rates for too long could be a challenge for equities
Equities can withstand higher rates due to higher growth expectations, but additional rate increases due
to sticky inflation will be more challenging near term.
S&P 500 has wobbled when the 10-year yield got above 4.5% Nonprofitable tech especially vulnerable to higher real rates
% Index %
5y5y OIS,
rhs
US 10Y
Treasury yield,
lhs
Non-Profitable
tech index, lhs
Source: Bloomberg, UBS, as of 19 April 2024 Source: Bloomberg, UBS, as of 19 April 2024
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Cross-asset: Markets were pricing for reflation, not stagflation
Typical cross-asset relationships are breaking; gold has rallied hard despite higher real rates, while
commodities moved higher even as the USD strengthened.
Dollar and commodities now have positive correlation Gold enjoys a sustained rally as real rates increase
Index $/oz & %
2400 -1.5
Gold 10y real yield (rhs, inverted)
2200 -1.0
2000 -0.5
1800 0.0
1600 0.5
1400 1.0
1200 1.5
1000 2.0
800 2.5
2010 2012 2014 2016 2018 2020 2022 2024
Source: Bloomberg, UBS, as of 19 April 2024 Source: Bloomberg, UBS, as of 19 April 2024
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M&A: Conditions continue to become more favorable for M&A
Good equity returns, low volatility, improving business confidence, tight credit spreads, an open high
yield issuance market, and easing lending conditions all support an M&A rebound
Jun- Sep- Dec- Mar- Jun- Sep- Dec- Mar- Jun- Sep- Dec- Mar- Jun- Sep- Dec- Mar- Jun- Sep- Dec- Mar- Jun- Sep- Dec- Mar-
M&A Heatmap 18 18 18 19 19 19 19 20 20 20 20 21 21 21 21 22 22 22 22 23 23 23 23 24
M&A Volume 641 454 368 457 627 350 401 265 72 375 587 509 625 593 526 456 497 221 288 217 301 247 178 73
FCI 0.0 0.7 -1.0 0.3 0.3 -0.1 0.3 -5.3 -0.9 -0.4 0.3 0.9 1.2 0.7 0.9 -0.2 -1.2 -1.1 -0.1 -0.3 0.3 0.2 0.9 1.1
Vistage CEO Confidence 7.2 7.1 6.4 6.7 6.5 6.2 6.6 7.0 6.5 6.9 6.9 7.1 6.9 6.7 6.5 6.7 5.6 5.9 5.9 6.1 6.6 6.1 6.3 7.0
Small Business Confidence 107.2 107.9 104.4 101.8 103.3 101.8 102.7 96.4 100.6 104.0 95.9 98.2 102.5 99.1 98.9 93.2 89.5 92.1 89.8 90.1 91.0 90.8 91.9 88.5
Markets
SPX 12% 16% -6% 7% 8% 2% 29% -9% 5% 13% 16% 54% 39% 28% 27% 14% -12% -17% -19% -9% 18% 20% 24% 28%
NASDAQ 25% 28% -1% 12% 9% 2% 38% 6% 32% 47% 48% 68% 43% 29% 27% 13% -21% -25% -33% -11% 32% 34% 54% 38%
Midcap 12% 12% -12% 1% 0% -4% 24% -24% -8% -4% 12% 81% 51% 42% 23% 3% -16% -17% -14% -7% 16% 14% 14% 21%
Smallcap 16% 14% -12% 1% -5% -10% 24% -25% -8% -1% 18% 93% 60% 46% 14% -7% -26% -24% -22% -13% 11% 7% 15% 18%
Rates
10Y rate 2.86 3.06 2.68 2.41 2.01 1.66 1.92 0.67 0.66 0.68 0.91 1.74 1.47 1.49 1.51 2.34 3.01 3.83 3.87 3.47 3.84 4.57 3.88 4.20
Federal Funds Rate 2.00 2.25 2.50 2.50 2.50 2.00 1.75 0.25 0.25 0.25 0.25 0.25 0.25 0.25 0.25 0.50 1.75 3.25 4.50 5.00 5.25 5.50 5.50 5.50
2s10s Spread 33 24 19 14 25 4 34 42 50 55 79 158 122 121 77 0 5 -45 -56 -56 -106 -48 -37 -42
Financing
IG Spread 1.2 1.1 1.5 1.2 1.2 1.2 0.9 2.7 1.5 1.4 1.0 0.9 0.8 0.8 0.9 1.2 1.6 1.6 1.3 1.4 1.2 1.2 1.0 0.9
HY Spread 3.6 3.2 5.3 3.9 3.8 3.7 3.4 8.8 6.3 5.2 3.6 3.1 2.7 2.9 2.8 3.3 5.7 5.5 4.7 4.6 3.9 3.9 3.2 3.0
SLOS Large -11 -16 -16 3 -4 -3 5 0 42 71 38 6 -15 -32 -18 -15 -2 24 39 45 46 51 34 15
SLOS Mid/Small -3 -8 -3 4 0 -6 6 -1 40 70 31 11 -13 -26 -11 -9 0 22 32 44 47 49 30 19
IG Issuance 12% -25% -15% -9% 10% 2% -6% 61% 184% 13% -14% -44% -4% -9% 6% 7% -7% -32% -33% -8% 25% 5% -32% 60%
HY Issuance 0% -48% -73% 6% 82% 99% 69% 7% 103% 45% 11% 102% 6% -2% -40% -71% -75% -81% -68% 59% 126% 91% 23% 93%
Volatility
MOVE 51.2 46.2 66.6 58.5 70.4 77.2 58.3 83.9 54.1 39.2 49.0 71.3 57.3 61.1 77.1 106.9 135.5 141.9 121.6 135.9 110.6 113.6 114.6 86.4
VIX 16.1 12.1 25.4 13.7 15.1 16.2 13.8 53.5 30.4 26.4 22.8 19.4 15.8 23.1 17.2 20.6 28.7 31.6 21.7 18.7 13.6 17.5 12.5 13.0
Note: SLOOS Large and SLOOS Mid/Small measure the change in tightening standards Negative Positive
Source: Bloomberg, UBS, as of 23 April 2024
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M&A: Strategic buyers likely lead the recovery from very low levels
M&A dealmaking still depressed in Q1; strategic buyers may dominate as they've been on the sidelines
waiting for a more favorable environment.
US M&A shows signs of troughing More strategic buyers relative to sponsors than the avg.
Number and count % of total volume
6,000 Volume, rhs Deal Count, lhs 700 100
Billions
600
5,000 80
500
4,000
60
400
3,000
40
300
2,000
200 20
1,000
100
0
Jan-23 Mar-23 May-23 Jul-23 Sep-23 Nov-23 Jan-24
0 0
Sponsor Strategic
2012 2016 2020 2024
Source: Bloomberg, UBS, as of 23 April 2024 Source: Dealogic, Citi, Bloomberg as of 15 January 2024
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Private Equity: Return of exits should be a catalyst to market recovery
Dealmaking starts 2024 on a still-sluggish note; collapse of exits in 2022 and 2023 has extended into
2024.
US dealmaking still sluggish, no strong rebound yet Overall exits muted and weighing on liquidity
Number and count Number and count
3,500 350 $120 45
Value, rhs Deal Count, lhs Exit value, lhs ($B)
Exit count, rhs 40
3,000 300
$100
35
2,500 250
$80 30
2,000 200 25
$60
1,500 150 20
$40 15
1,000 100
10
500 50 $20
5
0 0 $0 0
2012 2016 2020 2024 2012 2016 2020 2024
Source: Pitchbook, UBS as of 23 April 2024 Source: Pitchbook, UBS as of 23 April 2024
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IPOs: Signs of life in Q1, but still very early in the recovery
In the US, seven IPOs raised more than $500 million each in Q1, a vote of confidence from larger issuers.
But overall IPO market performance is recovering slowly.
North American IPO deal proceeds Renaissance IPO index recovery stalled in April
$B and count Index
400 Value, rhs Deal Count, lhs 160
350 140
300 120
250 100
200 80
150 60
100 40
50 20
0 0
2019 2020 2021 2022 2023 2024 *
Source: Bloomberg, UBS, as of 23 April 2024 Source: Bloomberg, UBS, as of 23 April 2024
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IPOs: Market will really open only if post-IPO performance is good
The ~30 US IPOs in 2024 had above-average 1st returns, but subsequent performance reversed that gain,
as the average price drifted lower.
IPO first day returns start 2024 with positive momentum But aftermarket performance lackluster
Median first day returns, % Performance, %
30% 30%
25%
25%
20%
20%
15%
15%
10%
10%
5%
5%
0%
-5% 0%
2000 2004 2008 2012 2016 2020 2024 Offer to first close Offer to date
Source: University of Florida, UBS, as of 23 April 2024 Source: Bloomberg, UBS as of 23 April 2024
57
Venture Capital: Very muted amid “higher for longer” rates
Q1 venture activity slows amid a softer environment in global VC, as exits remain limited; pre-seed
venture deal activity slips to the lowest share of all activity in recent memory.
70%
$80 4,000
60%
36.7% 36.5% 35.1% 32.7%
30.3% 31.4% 31.4%
$60 3,000 50% 32.3%
35.5%
40%
$40 2,000
30%
$0 0 0%
2016 2018 2020 2022 2024 2016 2017 2018 2019 2020 2021 2022 2023 2024
Pre-seed/Seed Early-stage VC Late-stage VC Venture Growth
Source: Pitchbook, UBS, as of 23 April 2024 Source: Pitchbook, UBS, as of 23 April 2024
58
Section 6
Sectors update
59
Sector Views: Tech, Healthcare, and Industrials in CIO Most Preferred
Tech: Valuations are rich but reflect strong fundamentals and secular growth. Massive rally from
last year have further enriched valuations but reflect strong RoE and fundamentals. Tech company
balance sheets still healthy and cash rich. Thus, they should be able to weather a high interest rate
environment better than other firms. Sector is likely to remain in favor unless there is a hard landing
which may have an outsized impact on select-mega caps.
Healthcare: Earnings to improve in 2024. Significant underperformance in 2023 holds back better
investor sentiment. Muted appetite for biotech IPOs reflects a degree of investor caution – especially
those lacking proof-of-concept clinical data. As a result, smaller biotech firms continue to struggle to
raise capital amid liquidity concerns. Consistent earnings growth through the economic cycle should
position healthcare well during any period of potential slowdown.
60
Sectors: Valuation and earnings growth dispersion is large
Tech and consumer discretionary trading at upper half of 30-year range while real estate and energy
trading at bottom of ranges. This mirrors earning expectations.
Earnings growth rates Historical P/E ratios for S&P GICS sectors
year/year, % % MAX
90 range
Communication
80
Health Care 70
IT 60
50
Consumer Discretionary
40 Q2 2024
Financials
30
MIN
Industrials 20
range
Utilities 10
0
Consumer Staples
Energy
Healthcare
Utilities
Financials
IT
Consumer Staples
Real Estate
Consumer Discretionary
Materials
Industrials
Real Estate
Materials
Energy
61
Sector Snapshot: Tech
62
Sector Snapshot: Healthcare
63
Sector Snapshot: Industrials
Source: Bloomberg, UBS, as of 23 April 2024 Source: Bloomberg, UBS, as of 23 April 2024
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