The US consumer will slow down as real disposable income growth nears zero and fiscal support fades, threatening equity markets despite strong first-quarter earnings driven by artificial intelligence, according to Bhanu Baweja, chief strategist at UBS Group AG.

Long-end bond yields have risen dramatically in the past few sessions, with the 30-year Treasury yield rising to levels last seen in 2007. Speaking to Bloomberg Television on Wednesday, Baweja warned this rise reflects strong nominal growth in the US rather than inflation concerns, with real yields driving much of the backup — especially at the long end of the curve.

He said the market’s one dimensional focus on AI hyperscaler capital expenditure spending overlooks slowdown risks in consumer and financial sectors, where strong first-quarter earnings growth masks underlying weakness.

“If the market is worried about inflation today, it ought to be worried about growth tomorrow,” he said.

Within this backdrop, the strategist expects large-cap stocks to outperform small caps and growth to beat value especially if the Middle East conflict continues, though he sees the US outperforming Europe even as both face headwinds.

Price action in the commodities market suggests traders believe the Iran conflict is in the rear-view mirror, Baweja noted, saying six-month oil futures are potentially too low given stalled negotiations and no clear diplomatic solution in sight.

Baweja identified value emerging in Japan and UK yield curves, which have become quite steep, while forecasting Bank of England rate cuts starting in 2027 rather than hikes this year, despite quick inflation pass-through.

Written by: Olivia Levieux and Francine Lacqua @Bloomberg (This story was produced with the assistance of Bloomberg Automation.)

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