Investment Guide in the Policy Fog: UBS predicts Fed rate cut in September, S&P aims for 6200 points by the end of the year.

Recently, the market focus has been on the direction of US policies - from the debate on the "big and beautiful" bill to the US intervention in the Iran conflict. With the end of the 90-day tariff suspension period approaching, the future weeks will shift focus to tariff decisions: whether to extend the suspension period or impose tariffs on countries that have not reached agreement. However, according to UBS, although policy uncertainty has dominated recent market volatility, the focus will gradually shift to macroeconomic data, especially the actual evolution of economic growth and inflation paths. UBS expects the US economic growth to slow down but not fall into a recession. As inflation pressure gradually passes on to end consumers, consumer spending will contract moderately, thereby restraining growth. In the coming months, the impact of tariffs on inflation data will begin to show. Considering the lag in price transmission and consumer response, economic growth may further weaken by the end of this year. Regarding the Federal Reserve policy, UBS expects a rate cut to take place in September. FOMC members generally believe that the inflation caused by tariffs is a one-time shock and will not lead to a sustained upward trend. Based on this judgment and expectations of slowed economic growth, UBS predicts that the Fed will cut rates by 25 basis points at each of the four consecutive meetings starting in September. The premise is that despite the market volatility caused by tariff issues, the effective tariff rate will stabilize at the current level of 15% - a rate that is not sufficient to trigger an economic recession. With the policy outlook becoming clearer, along with investors starting to digest favorable policies such as the extension of individual tax cuts and corporate tax incentives in the budget harmonization act, market volatility in the coming months will gradually return to normal. In this context, UBS recommends that investors be prepared for both short-term volatility and the opportunities for growth in 2026. In terms of investment strategy, UBS recommends: - Continuing to hedge political risks with gold. Sudden news may lead to rapid sell-off of risk assets, highlighting the value of safe haven assets; - Investing in quality fixed-income products. Institutional MBS and investment-grade corporate bonds can provide substantial returns and effectively hedge stock market fluctuations; - Long-term investors can position themselves in the stock market on dips. Once the tariff situation becomes clear, the Fed initiates a rate-cut cycle, and the market begins to price in earnings growth for 2026, the stock market will regain support - UBS expects the S&P 500 index to continue to fluctuate but gradually rise to 6,200 by the end of 2025. EPS is expected to grow by 6% to $265 in 2024, and further increase by 8% in 2026, with a target of 6,500 by June 2026. In terms of sector allocation, UBS has a neutral stance on both value and growth sectors. This month, the financial sector was upgraded to an "attractive" rating due to its expected benefits from regulatory easing and capital feedback after stress tests. At the same time, UBS maintains an "attractive" rating for communications services, healthcare, utilities, and information technology for the following reasons: - Communications services: Strong growth in digital advertising and the AI application trend driving growth; - Healthcare: Increased policy certainty, valuation advantages, and profit growth potential; - Technology sector: AI is expected to become a core growth engine in the coming years, especially optimistic about investment opportunities in the value chain foundation layer; - Utilities: Strong defensive attributes, relatively stable performance during economic slowdowns.