Investing.com -- UBS is encouraging investors to take advantage of the recent equity pullback in the U.S. and start buying into the weakness.
The bank argues that entering after a 10% drop in the S&P 500 has historically delivered the best absolute and risk-adjusted returns, and current market conditions resemble earlier non-recessionary slowdowns.
“Historically, buying the S&P 500 at a peak-to-trough drawdown of -10% has driven superior absolute and risk-adjusted returns, compared to waiting for larger drawdowns of -15 or -20%,” said Ulrike Hoffmann-Burchardi, Head CIO Global Equities at UBS.
Waiting for deeper corrections may lead to missed opportunities, he adds, especially if the market rebounds quickly.
The recent pullback in U.S. equities—now exceeding 10% from the February peak—is being attributed to rising policy uncertainty and signs of softer economic momentum. Despite the near-term risks, UBS does not expect the U.S. to slide into a recession this year and maintains a forecast of around 2% GDP growth over the next 12 months.
The firm sees current conditions as comparable to 2011, when markets faced debt ceiling gridlock and sluggish growth but ultimately avoided a major downturn.
Hoffmann-Burchardi notes that while there are similarities in policy-related uncertainty today, global growth conditions appear stronger, with fiscal expansion in both Europe and China helping to reduce the risk of contagion.
“Even though losses can be significant at a -10% entry, they have historically been more than offset by other periods when equities rebound quickly,” the report said. The S&P 500’s forward price-to-earnings (P/E) ratio has already compressed from 22.4x in mid-February to 20.2x as of mid-March.
Hoffmann-Burchardi believes that valuations are now more aligned with the historical range for the expansion phase of the cycle.
The strategist acknowledges that policy-driven uncertainty could weigh on key economic indicators such as consumer confidence and employment in the near term, creating further downside risks for equities heading into April.
Market volatility may persist in the coming weeks as investors navigate fiscal ambiguity and shifting expectations around trade and regulation.
Nonetheless, Hoffmann-Burchardi expects both the U.S. economy and equity markets to rebound in the second half of the year, recovering from the softer conditions anticipated in the first half.
As such, he sees the recent correction as a tactical entry point. “We suggest that clients use the coming weeks as a buying opportunity starting at a peak-to-trough drawdown of -10% in the S&P 500.”
Buying equities after a 10% decline has historically delivered stronger performance and a higher Sharpe ratio compared to waiting for deeper drawdowns, as markets tend to recover more frequently from this level.