The evolving landscape of U.S. stocks is being shaped by the interplay of artificial intelligence (AI), economic growth, and interest rate fluctuations. Initially, the pandemic boosted technology stocks due to increased demand for tech products during lockdowns. However, as inflation rose and central banks raised interest rates, the market experienced downturns and shifted towards safer assets. As we enter 2025, the focus remains on technology and macroeconomic factors that influence market sentiment.
In September, the Federal Reserve implemented a 50 basis point interest rate cut, leading to optimism in the markets and gains in major indexes such as the S&P 500, NASDAQ, and tech-heavy NASDAQ. This decision allowed businesses to pursue growth more aggressively, alleviating concerns about a tight labor market and potential economic downturns.
However, in October, major U.S. stock indexes experienced declines due to rising Treasury yields and uncertainty regarding the Federal Reserve's future interest rate strategy. A division among Federal Reserve officials regarding the pace of rate cuts added to market volatility.
The U.S. economy continues to perform well, with advancements in artificial intelligence playing a significant role. Investments in the hardware and software as a service (SaaS) sectors have seen substantial growth, highlighting the shift towards technologies that support AI development.
As the third quarter earnings season unfolds, Wall Street's focus is shifting towards Phase 2 AI companies, which provide essential infrastructure for AI applications. This reflects a growing recognition of the transformative potential of AI across various industries.
UBS has expressed a bullish outlook on U.S. stocks, citing a favorable economic climate characterized by slowing yet durable growth, healthy earnings, and continued interest rate cuts. The bank highlights the importance of the labor market, noting low initial claims for unemployment insurance and a surplus of job openings compared to the number of unemployed individuals.
In light of these developments, UBS sees AI as an attractive thematic investment opportunity. The shift in computing infrastructure to accelerated computing units (GPUs) is expected to have far-reaching implications for AI's effectiveness. UBS anticipates potential catalysts for growth, including possible export controls on China and upcoming third-quarter results that may lead to positive revisions in AI infrastructure capital expenditures.
To identify top U.S. stocks in this AI-driven environment, UBS ranks sectors based on attractiveness and the number of hedge fund investors. This strategy aims to capitalize on the performance of stocks favored by leading hedge funds, which have historically outperformed the market. Among the stocks highlighted is Colgate-Palmolive Company, a major player in the consumer goods sector with a dominant share of the global toothpaste market. The company's logistics network and brand recognition position it well for growth.