Talking Markets Podcast with Brian Levitt of Invesco
12:57 Share

Hi, everyone. Dan Cassidy here. Welcome back to the Talking Markets podcast series here on the UBS Market Moves podcast channel. Joining me for the conversation today, glad to welcome back from Invesco, Brian Levitt. Brian serves as global market strategist with the firm where he develops and communicates the firm's investment outlooks and insights.

for North America. Brian, it's great to have you back. As always, thank you for dropping by, spending some time with our listeners. I know we have a lot to catch up on, so thank you again for dropping by today. We sure do, and thank you, Dan. It's always my pleasure. So, it's been interesting times, Brian, over the

past few weeks, especially. I know we're making our way through the back end of Q1 of 2025. It was interesting just hearing from Chairman Powell yesterday. I think he used the word uncertainty 16 times in his press conference when it comes to his outlook for the U.S. economy. So against that backdrop, I'll ask you, how would you characterize the current health of the U.S. economy today? And how do you anticipate conditions

might evolve throughout the balance of twenty twenty five the setup for the economy coming into the year was quite good the resilient economy uh... inflation that had stabilized so it good backdrop uh... what we're dealing with now is of course the policy on circuit that you suggested uh... i think we'll get the ruin but the the challenge right now is that businesses consumers that investments don't fully understand the rules of the game

And so that's when you tend to get market volatility, and that's when you tend to get slowdowns in spending and investment, which is precisely what we're seeing. Now, Brian, one of the culprits of the volatility we've seen in markets over the past few weeks, uncertainty surrounding U.S. trade policy tariffs. We have a key date coming up on April 2nd. We're recording here today on March 20th.

But how do you anticipate that the policy environment will evolve from here? And what do markets really need to see at this point in order to find a bit of footing? The markets need to see an environment that's similar to what we saw in 2018 when the Trump administration agreed to a 90-day truce with China.

The Federal Reserve sounded more dovish signals. That's how you put in a market, put in a bottom to that 20 percent downturn in markets that we saw in the fourth quarter of 2018. So I view this similarly. The longer the uncertainty persists or the back and forth with regards to reciprocal tariffs goes on, the longer the volatility would be and the deeper the downturn would be in

I believe, I hope, I believe that ultimately we will get greater clarity regardless of where those tariff rates are set. I believe it's an economy that can evolve, can withstand it. But the critical thing is making sure that we understand what that trade policy will look like and then move beyond it with respect

with regards to being front and center in investors' minds. Now, I know trade seems to be marquee at the moment, though, outside of trade policy. Are there any other economic policy, legislative priorities of the current administration and Congress that you're monitoring at the moment that could pose any notable implications to the markets? Sure. My big concern is that you'll end up in a place...

It's not my primary base case, but my concern would be that you end up in a case where there's fiscal cuts going on and monetary policy tightening going on. So clearly what's happening with DOGE, the Department of Government Efficiency, is worth watching. You will start to see the unemployment rate creep up as...

as a result of it, albeit from a very low level. I don't think that's, you know, there's not going to likely be enough spending cuts to drive this economy into a recession. But the risk would be if on the other side of that, inflation starts to pick up with, you know, what's going on in the trade policy front and the Federal Reserve feels like they have to raise rates. That would be the big risk. My view is that ultimately Doge

and tariffs will move towards the background. The focus for investors will move towards the extension of the Tax Cut and Jobs Act. And of course, that's more favorable for markets. So perhaps a bit more volatility in here until investors can move beyond Doge and tariffs with a little greater policy clarity. And then the focus will likely come to some of the legislation that's

And then with respect to the Fed, it's timely that we're speaking this week fresh off of the latest FOMC meeting. But any takeaways from yesterday's statement press conference? And what are your expectations for monetary policy in 2025, thinking in terms of potential growth?

potential rate cuts. Yeah, I suppose the market viewed it as somewhat dovish. The Federal Reserve is slowing down the runoff with regards to quantitative tightening or the size of the balance sheet. They indicated, which I think is critical, that they're willing to see through any price movements that are directed, that are

that are driven by tariffs and they're going to look through that to focus on what's going on broadly with prices, other core goods that don't have tariffs on it, as well as services. So that's a positive. And they stay indicated that they believe the balance of risk is on growth, not inflation. So,

that suggests a more dovish stance. If I look at where the Fed is now, you know, a target rate of four and a half, neutral rate is probably closer to three and a half. The

The economy is slowing. I would like to see them get rates closer to three and a half. Now, whenever I call, they don't always answer my phone call. But I would like to see rates start to come down. I'd expect a couple of rate cuts this year. That seems that the market has priced in. And again, if we have to go the other way on that, that's the bad outcome. But

but a more accommodative policy stance is likely to help firm up these markets. And then if we jump around to thematics, it may seem like a tired conversation, but certainly still relevant. Artificial intelligence remains one of these multi-year megatrends, closely followed by our chief investment office here at UBS. And we certainly have seen the market impact to

the developments of cheaper models out of China, such as DeepSeek here in 2025. But what are your thoughts on how to play the AI trade? What are your thoughts on the overall impact this theme could have to the economy near term? Well, the impact is likely to be substantial over the over the intermediate and long term periods. I mean, we're already seeing it how we operate, certainly making us better at our jobs already, which is which is good.

The market was primarily focused on the chips producers, the hyperscalers, hasn't even really begun to consider what the downstream effects will be in health care or financial services or other places. So I think that's a long runway. The biggest issue with regards to the mega cap stocks in the U.S., the so-called hyperscalers, is...

what is going to be the result of all the investment? And so these companies which had been generating outsized earnings growth compared to the rest of the market are now seeing that earnings growth moderate towards the rest of the market. And that's because of the huge investment that they've made. So at some point, you know, the market's going to have to discern who's making money out of all this. We know the use case. We know it's going to be, you

We know we're all going to be using it, but who's going to figure out how to make money in this? And so there may be a there's a moment of consolidation right now with regards to the market. And I think to me, my opinion, that the better opportunities exist outside of the mega cap AI names right now. For that predominant reason, their earnings growth is moderating in line with the rest of the market.

With that, Brian, do you anticipate perhaps the concentration in AI names, these Mag7 names, might that begin to broaden out, is what you're suggesting? That is what I'm suggesting, and it's already started to happen. You know, these...

we can reduce concentration in one or two ways. The nice way is you get a global economic recovery and all the, all ties, you know, the rising tide lifts all boats, or you get it this way where we had a valuation adjustment in the mega cap. But this was shaping up to be an environment that was more conducive to broader markets. If you think about the, the,

The decade after the global financial crisis or even which came into this post-COVID period was only a handful of names winning in what was a relatively slow growth, benign and low inflation world. What we're moving towards now is a higher nominal growth world with inflation increasing.

further up in the Fed's comfort zone. And so that's not necessarily a bad thing. That means that should mean better nominal growth for more parts of the market. And a lot of those markets are trading at more reasonable valuations. You see it in U.S. mid-cap stocks, U.S. value stocks, and you're seeing it in European equities where valuations are more attractive and

If you get to a point with more synchronized global growth, synchronized global recovery, that should broaden out the market. Thank you, Brian. Yeah, a lot there to consider. So before we close out, if we take a step back and just thinking back to your thoughts on the economy, the

policy environment in 2025. What do those factors mean for your investment outlook from here? And just looking across the asset allocation table, where are you seeing the most opportunity at the moment? Right now, you have leading indicators pointing lower in the U.S. So in an environment when leading indicators are pointing lower, you're

You tend to want to be more defensive, lower volatility. And so that's been working. My point is to say that when we get to the other side of where we are on policy with better clarity and more dovish policy accommodations from the Federal Reserve, that's when we can start to see sentiment start to improve.

leading indicators start to pick up again. And that tends to favor more value-oriented markets, small cap, non-U.S. And so I think we're going to get there this year. Right now, still up in quality, still more defensive, still favoring lower volatility mainstream.

Well, Brian, thank you for dropping by Talking Markets today, spending some time with our listeners, our clients here at UBS. We'll definitely continue the conversation at some point, though. Thank you again, Brian, for your time and your insights you've shared with us today. My pleasure. Thank you.

Thank you for tuning in. Be sure to visit UBS.com slash studios to view the entire UBS Studios suite of podcast channels, along with our video offerings, such as UBS Trending. You can also follow us on Instagram for content highlights at UBS Trending. UBS Studios is part of the UBS Chief Investment Office within UBS Global Wealth Management. Visit UBS.com slash CIO to view the latest research.

Thank you.

It is important that you understand the ways in which we conduct business and that you carefully read the agreements and disclosures that we provide to you about the products or services we offer. For more information, please review Client Relationship Summary provided at ubs.com forward slash relationship summary or ask your UBS financial advisor for a copy.