Strong AI investments helping support stocks overall - UBS

Investing.com -- Markets could prove to be volatile this week, analysts at UBS argued on Monday, although they said that the current environment is "supportive" for U.S. equities thanks in particular to strong investments in artificial intelligence.

The analysts said in a note to clients that stocks could be impacted by the upcoming Federal Reserve policy decision on Wednesday, as well as fresh U.S. jobs data and earnings reports that represent 30% of the benchmark S&P 500's market capitalization.

But they said that shares should remain underpinned by recent news that Facebook-parent Meta Platforms (NASDAQ:META), Google-owner Alphabet (NASDAQ:GOOGL) and software titan Microsoft (NASDAQ:MSFT) are all planning to raise capital expenditures in a bid to secure their position in the race to develop and eventually monetize so-called generative AI.

"[W]e remain constructive on US equities, and expect AI-related companies to drive strong earnings growth in the years ahead," the UBS analysts said. "We think it is key for investors to hold a healthy strategic allocation to tech stocks, but also advocate diversified exposure across regions and sectors."

Meanwhile, the analysts believe further support will come from "largely solid and intact" corporate fundamentals, citing the fact that more than half of the S&P 500 firms have reported quarterly earnings and some three-quarters of those have beaten income estimates.

Inflation, which has proven stubbornly elevated in recent weeks, is also expected to begin to slow down once again, they said, adding that this could lead to a pivot in the Federal Reserve's restrictive monetary policy "later this year."