UBS Group has warned that U.S. consumer spending is poised to cool, as real disposable income growth has already approached zero, posing a key risk to U.S. equities. The market has misread the recent rise in long-end interest rates: this reflects strong nominal growth rather than inflationary pressures.
Although AI-driven U.S. corporate earnings delivered a strong performance in the first quarter, the risk of cooling consumer spending is emerging as a potential obstacle to further upside in U.S. equities.
According to Bloomberg, Bhanu Baweja, Chief Strategist at UBS Group, noted that as real disposable income growth approaches zero and the effects of fiscal stimulus gradually fade, a slowdown in U.S. consumer activity will pose a tangible threat to equity markets. He stated that the market has overly focused on capital expenditures related to AI hyperscale data centers while overlooking downside risks in the consumer and financial sectors—two areas whose robust first-quarter earnings growth masked underlying vulnerabilities.
He also pointed out that the yield on the 30-year U.S. Treasury note has surged sharply to its highest level since 2007. While the market widely interprets this as heightened inflation concerns, Baweja disagrees—arguing instead that it reflects strong nominal growth in the U.S., with real yields being the primary driver behind the rise in long-end rates. He cautioned that the current perception of ‘robust growth’ is largely consumption-driven, yet a pullback in consumer spending appears imminent. When that occurs, the growth expectations currently priced into markets will face significant downward revisions. ‘If the market is worried about inflation today,’ he said, ‘it should be worried about growth tomorrow.’
Strategic Outlook: From Equity-Bond Allocation to Geopolitical Risk
Against this backdrop, Baweja expects large-cap stocks to outperform small-cap stocks and growth stocks to outperform value stocks, particularly amid ongoing geopolitical turbulence in the Middle East. Despite headwinds facing both the U.S. and Europe, he still anticipates U.S. equities to outperform European equities.
In commodity markets, current price action suggests traders have largely priced in the impact of the Iran conflict, but he disagrees with this assessment. He believes six-month oil futures may currently be undervalued, given stalled negotiations and an unclear diplomatic path forward. Should geopolitical tensions escalate again, commodity markets would face repricing, thereby disrupting inflation expectations and corporate input costs.
From a global allocation perspective, yield curves in Japan and the U.K. have steepened and now offer some investment appeal. Regarding the U.K., he forecasts that the Bank of England will begin cutting rates in 2027—not this year, as some market participants expect—despite the relatively rapid pass-through of inflation in the U.K., marking a clear divergence from prevailing market consensus.