The biggest enemy of the U.S. stock market bull run is not inflation, but stagnant consumption?

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Despite strong AI-driven first-quarter earnings performance among U.S. companies, the risk of cooling consumer spending is emerging as a potential stumbling block for U.S. stocks.

According to Bloomberg, UBS Chief Strategist Bhanu Baweja pointed out that as the growth rate of real disposable income nears zero and the effects of fiscal stimulus gradually fade, the slowdown on the consumption side in the U.S. will pose a substantial threat to the stock market. He said the market is overly focused on capital expenditures for AI hyperscale data centers, while ignoring the slowdown risks faced by the consumer and financial sectors—where strong first-quarter earnings growth masked their underlying fragility.

He also noted that the yield on 30-year U.S. Treasuries has recently surged, reaching its highest level since 2007. While the market generally interprets this as rising inflation concerns, Baweja disagrees—what it reflects is robust U.S. nominal growth, with real yields being the main driver pushing up long-end rates.

He cautions that the current so-called “strong growth” mainly relies on consumer support, which is about to cool. When that happens, the growth expectations currently priced by the market will face a major downward revision. He said: “If the market is worrying about inflation today, then tomorrow it should be worrying about growth.”

Strategic Outlook: From Asset Allocation to Geopolitical Risks

Against this backdrop, Baweja expects large-cap stocks to outperform small-cap stocks, and growth stocks to be better than value stocks, especially amid ongoing turbulence in the Middle East. Despite unfavorable factors facing both Europe and America, he still believes U.S. stocks will perform better than European stocks.

In the commodity markets, current price trends suggest traders have mostly priced in the impact of the Iran conflict, but he disagrees with this assessment. He believes six-month oil futures prices may be undervalued at present, because negotiations are deadlocked and a diplomatic solution remains unclear. If geopolitical tensions rise again, the commodity markets will need to be revalued, which will then disturb inflation expectations and corporate costs.

Globally, Japan and the UK yield curves have become steeper, offering some investment value. Regarding the UK, he expects the Bank of England to begin cutting rates in 2027, rather than hiking this year as some in the market predict—despite the faster inflation transmission in the UK, his view diverges significantly from mainstream expectations.

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