'This is when money is made': Why UBS is still bullish on US stocks, despite rising recession risk and stagflation signs

• Stocks underwent mind-bending swings in an unforgettable week in markets.
• Investors are bracing for an economic downturn as the threat of a trade war looms.
• An equities head at UBS shared the firm's glass-half-full case, despite recession risk.

Top minds at UBS Global Wealth Management say the US still has a path to avoid a recession, even though it's more like a tightrope than a four-lane highway.

President Donald Trump's ever-shifting trade policy has led to fears that a downturn is imminent, which spooked markets. Most economists believe tariffs hurt growth and lead to higher prices.

In less than two weeks, investors have weathered a near-record crash, enjoyed one of the largest single-day gains ever, and gotten smacked as the selling resumed.

Complicating matters is that it's unclear exactly what Trump's trade policy is aiming to achieve. And no one — perhaps not even Trump himself — knows what will happen in a few days or weeks, much less next quarter or next year.

That makes it almost impossible for many businesses to make crucial decisions, like whether to build a factory or hire workers. Consumers are also nervous about another wave of inflation, even though price growth is, surprisingly, headed in the right direction.

In turn, top business leaders and economists suspect that spending will dry up. Even optimists say a slowdown may be inevitable, and a downturn is a major risk.

But if the increasingly confident bears are wrong, US stocks can skyrocket. Investors can't know for sure which way markets are headed, but if they guess correctly, they'll be swimming in cash.

"This is when money is made," David Lefkowitz, the head of US equities at UBS Global Wealth Management, said in a recent interview. "I'm not saying it has to be a bullish call. If you have the conviction to say, 'We're going to end up in a bad state,' there's money to be made there, too."

De-escalation — or else

Heading into 2025, Lefkowitz and his colleagues thought the S&P 500 was set for a solid but unspectacular 9% return. They believed tariffs were a risk, but not one worth losing sleep over.

Like many major investment firms, UBS has since recalculated. The firm's new S&P 500 target is 5,800, down from 6,400, which suggests stocks will claw back losses and be flat for the year.

That bullish thesis is based on one crucial assumption, Lefkowitz said: the Trump administration is aware and wary of the harm its tariffs will cause — and will respond accordingly.

"There's no way to get around this: You've got to believe that — in order for our forecast to come to fruition — you have to have confidence that there will be some de-escalation," Lefkowitz said. "If not, then our forecasts are too optimistic."

De-escalation would require Trump to back away from the astronomically high "reciprocal" tariffs that he outlined on his so-called "Liberation Day" — which have little to do with what tariffs other countries impose on the US. China is an exception, given its heavily criticized trade tactics.

If what Lefkowitz sees as a best-case scenario plays out, the worst of the trade war could already be over. In fact, the equities head wrote in an April 10 note after Trump's decision to temporarily pause tariffs on most nations that "we may have passed peak policy uncertainty."

That, of course, assumes that Trump can reach trade deals in the next 90 days — and that he doesn't change his mind again. Lefkowitz acknowledged that those are legitimate concerns.

"Everybody is very nervous," Lefkowitz said. "And frankly, I think there's a lot of fear out there. And I understand."

However, the longtime strategist is confident that Trump still cares about the stock market and is also willing to respond to a near-revolt in the bond market.

"We think the administration is signaling that they are attuned to this; they're not ignoring it," Lefkowitz said.

He added: "It doesn't appear that their goal is to drive the US economy into a ditch. But if they don't change and start to de-escalate, we will end up — we very likely will end up — in a ditch."

Needless to say, the US economy being "in a ditch" would mean a recession and substantial earnings declines of around 20%, which could lead to a historically bad stretch for US stocks.

"We need good news on the trade front — there's no doubt," Lefkowitz said. "And if we have further escalation, that's going to be negative for risk assets."

The narrow route around a recession

Even if all goes right in the US economy, the S&P 500 would need a heroic performance to reach UBS's year-end price target, despite the recent downward revision.

There is little room for error in the firm's forecast. UBS slashed its corporate earnings outlook from 6% growth to flat profits, though that could still be a win in this highly volatile backdrop.

If S&P 500 earnings stay level at $250, back-of-the-paper math reveals that the index would need to command a historically high 23x earnings multiple to hit the firm's target of 5,800.

On a forward-earnings basis, the multiple would be 21x, Lefkowitz said. For reference, the market had traded at 22x forward earnings before this sell-off and is now hovering at 18x.

This may seem like a stretch in what Lefkowitz believes will be an economic soft patch, even if it's not a recession. He even said that the US is in "a mini-stagflation environment right now."

However, Lefkowitz noted that the market is forward-looking, so it could shrug off economic weakness if it's clear that trade wars are ending and earnings estimates are rising again.

"If the market can gain confidence that growth's improving, inflation's coming down — that is equity-positive," Lefkowitz said.

In the meantime, UBS advises that investors hide out in growth-heavy sectors like technology and communication services, as well as defensive groups like healthcare and utilities.

"Having some balance between the two makes sense," Lefkowitz said. "Because we will have a slowdown."