According to Woofun AI, UBS (UBS.US) revealed in the global stock strategy report released on October 19, 2026, that although the AI sector experienced a significant 5% correction last week, the market is experiencing structural differentiation that accelerates risk removal and breadth improvement. With the exception of AI, as many as 400 stocks recorded 2.5% gains, and all constituent stocks in the weighted S&P 500 index except technology stocks rose. UBS (UBS.US) believes that the implicit correlation between the current market is too low. If pressure on interest rates and oil prices ease, the risk of the US midterm elections is not realized, AI demand continues to be supported, earnings reports exceed expectations, and repurchase activities pick up, the probability that the technology and non-technology sectors will rise in tandem is being seriously underestimated by the market.
At the macro level, soaring yields and resetting valuations became the dominant logic. Although bond yields declined somewhat, the CPI data was heated, and WTI crude oil rose 10% due to the tense situation in Iran, increasing market volatility. Machine learning models show that the weight of the Federal Reserve's policy expectations in explaining returns has increased, and although AI still ranks first, it has declined from the peak. Since the beginning of September, the sharp rise in yield has been due more to position cancellations rather than simple growth and repricing. The S&P 500 forward price-earnings ratio has fallen by about 20% since the end of last year, and the valuation reset has been completed.
Notably, interest rate sensitive industries, such as capital goods, utilities, consumer durables, real estate, and banking, lost more than implied by macro-variables, and transportation and retail also lagged behind due to oil price sensitivity. The US 10-year yield rose to 1.5 standard deviations above the 1-year average for the seventh time in the past year. Historically, there was no significant decline for more than two months after this period. UBS (UBS.US) points out that if the Federal Reserve raises interest rates by less than 100 basis points within a year of surging yields, the MSCI Global Index and the S&P 500 will rise by an average of 8% to 10% over the next 6 months and 15% to 18% in the next year; conversely, if the aggressive interest rate hike cycle of 1994, 1999, and 2022 is repeated, the stock market may have negative returns or remain flat for the next year. Higher yields partly reflect government debt burdens, and partly reflect faster productivity growth, deregulation, and stronger nominal growth. Higher threshold interest rates are seen as the price for a more dynamic economy.
According to data compiled by Woofun AI, yield fluctuations have surpassed stock fluctuations, and the risk of further tightening interest rate expectations needs to be hedged.
In-depth analysis of AI fundamentals shows that cloud revenue acceleration and capital expenditure form the core support. Cloud revenue from hyperscale vendors is expected to increase 60% year over year in the third quarter, significantly higher than 50% in the second quarter. Cloud revenue is expected to reach $574 billion over the next four quarters, which is about 15% higher than the agreed forecast, and an increase of about 73% year over year. UBS (UBS.US) believes that the acceleration in cloud revenue may drive an increase in cloud sales in 2027 and become a circuit breaker for AI sell-off.
Although the surge in CoreWeave (CRWV.US) credit default swaps (CDS) has caused sector sell-offs, and financing costs and structural concerns suppress capital expenditure commitments, new cloud vendors account for about 7% of capital expenditure in 2027, with an enterprise value of about 130 billion US dollars. Computing demand far exceeds supply, and capital issues will not change the overall AI construction trend. UBS (UBS.US) emphasized that the operating cash flow and borrowing capacity of hyperscale vendors is sufficient to support AI needs.
Furthermore, the second-quarter earnings threshold is low. Nearly 70% of companies expect earnings per share to grow at a lower rate than in the second quarter, and median stocks have fallen by more than 7% since the beginning of the second-quarter earnings report. However, the profit correction was still strong, with an overall increase of 1.8%, a 3.6% increase in the technology sector, and a 0.8% increase in the non-technology sector. The combination of low threshold and strong correction helped the financial report exceed expectations.
Key catalysts and options strategies focus on election risk and hedging solutions. Key catalysts for the next two weeks or more include the October 28 Federal Reserve meeting, employment and wage data, inflation data, oil prices, November 3 midterm elections, tech earnings, and the buyback window. These variables will determine the stock market's path into 2027. According to historical data, the S&P 500 rose by an average of 6% in the midterm election year from the end of September to the end of December, and by an average of 14% in March of the following year. UBS (UBS.US) suggests buying the S&P 500 December fictitious call option to participate in a potential linked rise while retaining downside protection.
Although the implied volatility of options is high, index protection is expensive to carry, and dispersion suppresses index fluctuations. To hedge against risk, UBS (UBS.US) also recommended buying HYG (HYG.US) downside protection to prevent the double impact of rising yields and high yield spreads at the same time. Credit spreads remain calm as interest rate fluctuations rise, but an unexpected tightening cycle may impact low-quality high-yield bonds and leveraged loans first.
Additionally, S&P 500 put options can be funded by selling utility put options to optimize the cost structure.
Global asset allocation recommendations point to industry rotation and regional comparison. The price-earnings ratio for US utilities is about 15 times, close to a 10-year low, while the price-earnings ratio for essential consumption is about 25 times. The compound profit yield of utilities plus earnings per share is close to 16%. Consumption is about 11%, and utility congestion is lower than required consumption. UBS (UBS.US) suggests selling essential consumer call options and buying industrial call options.
In Europe, the valuation of renewable energy is lower than the level implied by the macro model, and the negative impact of rising bond yields exceeds the positive impact of rising natural gas prices; the correction of EU industrial profits is accelerating, and AI capital expenditure is shifting from product suppliers to industrial enterprises that build production capacity. It is recommended to increase the EU industry's consumption cycle and increase the EU's renewable energy. In terms of regional comparison, the S&P 500 has a valuation discount of about 15% compared to FTSE 100, which is 22% stronger than profit growth; the FTSE 100 defense sector accounts for a high share, and lack of profit growth offsets the high real yield.
KOSPI has the strongest two-year earnings per share outlook. The price-earnings ratio is lower than India. South Korea's current account surplus accounts for 5% to 6% of GDP, and India's current account deficit is about 2%. UBS (UBS.US) suggests going long for S&P 500 versus FTSE 100 and KOSPI versus NIFTY 50. Energy has risen more than 50% this year, and high oil prices may disrupt demand. Operating cash flow increased by about 25% year on year, but with the exception of large-scale manufacturers, the ratio of capital expenditure to operating cash flow is close to a record low. It is recommended to begin reducing energy exposure and reallocating some risks to the industry. As AI-related industrial demand will remain strong when interest rates rise, capital expenditure will spread from AI and data centers to the recovery of the manufacturing industry.