AI-induced stock market gains may be front-loaded - UBS

Investing.com - U.S. equity markets have been buoyant as the first quarter nears its end, but UBS warns that investors need to position their portfolios for the next stage amid the possibility that the enthusiasm surrounding artificial intelligence could be front-loaded. 

The main indices on Wall Street are on course to record a strongly positive week, with record closing highs seen in the last two sessions.  

Looking ahead to the second quarter, UBS sees the next stage of two primary market drivers playing out: the start of rate-cutting cycles by major central banks, and the broadening-out of AI adoption and implementation across a wider range of companies.

The bank forecasts 18% earnings growth for the global technology sector this year and 72% annualized growth in AI revenues over the next five years. 

“The rising excitement over artificial intelligence and its implications could lead to a scenario in which future gains are front-loaded. Investors looking to grow wealth should ensure they have exposure to this space, balancing a focus between sector leaders and the likely beneficiaries of tech disruption,” analysts at UBS said, in a note dated March 22.

“But equally, after such a strong run in AI-related stocks, the risk of over-concentrating portfolios has risen.”

The Swiss bank expects the Federal Reserve to cut interest rates in the coming months, likely starting in June.

“To prepare portfolios for lower rates, investors need to be proactive and shift their cash and money market holdings toward more durable sources of income, including fixed-term deposits, short-term bond ladders, and medium-duration high-quality bonds,” UBS added.

UBS warned that effective management will be key.

“The temptation to manage risk by simply cashing in on gains or retreating to the sidelines may be strong, but history favors those who pursue a more balanced approach,” UBS analysts said.

“We believe that only by diversifying across asset classes, regions, and sectors can investors fully manage the tension between navigating short-term market dynamics and growing long-term wealth.”