US stocks downgraded by UBS after recent rebound but continued uncertainty

UBS has downgraded its view on US equities to 'neutral' from 'attractive', following the recovery of the S&P 500 from the correction sparked by Donald Trump's 'reciprocal' tariffs announcement and expectation of continued market volatility. 

After the US and China's weekend agreement to lower tariffs for 90 days while talks continue, UBS flagged US court challenges to the Trump administration’s tariffs starting this week.

Mark Haefele, chief investment officer of UBS, said: "While the 90-day cooling-off period has provided a reprieve, uncertainty is still high, and investors will soon begin to focus on whether this temporary fix can evolve into a lasting agreement."

He said the downgrade "is not a bearish view, nor a call to sell equities", and he recommended that investors maintain "a full strategic allocation to US stocks" and over the coming 12 months expected equities to be higher than current levels.

In particular, UBS retained an "attractive" rating on various US sectors: communications services, information technology, health care, and utilities.

The recent sell-off in pharma on concerns over tariffs and drug pricing is "overdone at current valuations, particularly given the legal challenges that Trump’s intended actions will likely face", he added.

Tariff reductions for China agreed in initial rounds of talks have exceeded market expectations, and if they are sustained or reduced further, Haefele said there could be potential upside above his current forecast of 5.5% growth for the MSCI China earnings growth.

"Looking beyond the 90-day pause, the durability of this rally will depend on two key factors: whether US-China negotiators can turn this into a lasting trade agreement, and how Beijing proceeds with anticipated stimulus now that external risks appear to be easing."

Haefele said growing legal challenges and the steady erosion in presidential approval ratings have led to the gradual but substantial rollbacks in tariffs.

"The upcoming court challenges to the Trump administration’s tariffs could accelerate this process, and the Court of International Trade’s hearing on 13 May regarding the unprecedented use of the International Emergency Economic Powers Act (IEEPA) of 1977 could play a pivotal role in determining the legality of the tariffs.

"While the outcome remains uncertain, these legal developments warrant close monitoring and could become a key force in lowering tariffs in the months ahead."

The UBS view is that the net effect will be an effective US tariff rate around 15-20% by year-end, compared to roughly 25% currently. 

If tariffs remain as they are under the US-China 90-day reprieve, UBS estimates the impact on the US economy would be "similar to a 2% VAT hike. It would hurt growth in the near term and push up prices, but should not trigger a full-blown recession."