4 reasons the stock rally is likely safe from a major slip-up, according to a UBS asset-allocation chief

• Stocks are well positioned for more upside as investors, UBS said in a blog post.
• Growth outlooks remain strong, while speculation trades are at a "tame level," said Jason Draho, the head of asset allocation Americas at UBS Global Wealth Management.
• Macro-disappointment is the main near-term risk, and the climb higher could slow, he said.

Though risks to the equity rally could materialize in upcoming data, there are four reasons the market is well positioned for more upside, UBS outlined in a blog post on Monday.

"The relentless climb higher for risk assets may slow and could well have some slip-ups in the near term as the weather turns warmer, but we still expect the direction of travel for the rest of the year to be higher," wrote Jason Draho, the head of asset allocation Americas at UBS Global Wealth Management.

To start, growth outlooks for the US economy have remained strong among investors, even as recent labor market and production inputs have come in mixed. Since October, the S&P 500 has risen in line with GDP growth consensus, which now stands at 2%.

Secondly, not only does this counter concerns over stubborn inflation but, the improved growth outlook means equities have turned immune to tighter central bank policy. That's made clear by the fact the S&P has notched a series of record highs, even as markets higher-for-longer interest rates have become increasingly priced in for the rest of 2024.

Third, stock price reactions to fourth quarter's earnings have varied widely. It means that micro-factors — such as AI adoption — are becoming a leading consideration for markets, as opposed to systematic macro-factors.

"Dell, NVIDIA, Meta, and Netflix were all up at least 10% the day after their announcements, while Tesla, Snow, and Snap were all down more than 10%. Low correlations are a by-product of high return dispersion, and for the S&P 500 it's about as low as it's been in many years," Draho said.

Finally, although today's rally has increasingly been compared to the 1990s bubble, the IPO craze that dominated the period is missing today. Instead, mega-cap tech stocks and IPO returns have diverged since last year, demonstrating that traders are less willing to invest in smaller, speculative equities.

"Good fundamental macro and micro factors are lifting US equities higher, with investors differentiating between winners and losers, and speculation still at a relatively tame level," Draho summarized.

Of course, markets could still skew on growth disappointment. While January's hotter-than-expected inflation did not push the rally off the rails, markets would lose momentum if the trend extended beyond the month.