UBS Wealth Management: The Federal Reserve is expected to cut interest rates by 100 basis points in 2024, and the S&P 500 is expected to rise to 5900 points by the end of the year

According to the Zhitong Finance APP, the office of the Chief Investment Officer for Asia Pacific at UBS Wealth Management stated that the Federal Reserve is a latecomer to the global easing cycle. The European Central Bank has already cut interest rates twice. The Swiss National Bank, the Swedish Central Bank, the Bank of Canada, the Reserve Bank of New Zealand, and the Bank of England have also lowered interest rates. However, Federal Reserve Chairman Powell emphasized that the Fed does not believe it is behind the curve. He stated that the U.S. economy remains robust, with a strong labor market. Despite the 50 basis point rate cut, the committee is not in a hurry to cut rates at the moment.

UBS Wealth Management pointed out that the Fed's updated economic forecasts confirm Powell's statement that the committee does not see an increasing risk of recession. The Fed now expects the unemployment rate to be 4.4% by the end of this year, slightly higher than the 4% forecast at the June meeting but still below historical norms. The forecast for the end of next year remains at a low level of 4.4%. At the same time, the Fed expects GDP to achieve steady growth, with a year-on-year growth of 2% in the fourth quarter of this year and similar growth rates over the next three years. This is consistent with the bank's expectation of a soft landing for the U.S. economy.

The dot plot reflecting Fed officials' interest rate expectations shows that there will be two more 50 basis point rate cuts at the remaining policy meetings this year, followed by another 100 basis point cut in 2025. This is in line with the bank's expectations for the Fed's loose monetary policy pace. Historically, the U.S. market has performed well when cutting rates outside of a recession, and this time is unlikely to be an exception. The bank's base case scenario remains that the S&P 500 index is expected to rise to 5900 points by the end of the year and further to 6200 points by the end of June 2025.

In this context, UBS Wealth Management believes that investors may consider deploying in a declining interest rate environment. Given that various evidence shows that inflation is under control, the Fed can now focus on supporting employment and growth while reducing the probability of a recession. The bank's base case scenario still expects a total rate cut of 100 basis points in 2024. With cash returns declining, investors may consider reallocating cash and money market funds to high-quality corporate and government bonds. In the recent volatile market conditions, these assets have shown good value.

The bank also believes that the scope of the stock market rally is expected to expand, with growth stocks having the potential for sustained upside, especially in the technology sector. In the technology sector, artificial intelligence (AI) may become a key driver of market returns in the coming years, so increasing exposure to this sector may be considered. Although sector volatility may rise in the coming months due to cyclical and geopolitical risks, this also provides an opportunity to establish a long-term AI position at more reasonable prices.

Furthermore, UBS Wealth Management suggests that incorporating alternative assets into a well-diversified investment portfolio can help navigate changes in the macroeconomic backdrop. The bank believes that alternative assets are a strategic source of diversification and risk-adjusted returns. Hedge funds with low correlation to traditional assets may help reduce portfolio volatility. However, alternative assets come with unique risks, including illiquidity and low transparency