Bhanu Baweja, chief strategist at UBS Group AG, said margin pressure poses a material risk to equities in 2027 even as near-term earnings growth should continue supporting stock prices through the end of 2026.
US earnings growth has remained strong, a dynamic that has underpinned the rally in equities. That strength, Baweja said, should extend into 2027 but with diminishing force as cost pressures begin to weigh on net profit margins.
The timing of margin compression matters for equity valuations. If earnings per share flatlines while multiple expansion has already run its course, the mathematical case for further price appreciation narrows. Baweja did not specify a threshold at which margin pressure would become acute enough to reverse the current uptrend, but the framework he outlined, strong near-term growth followed by margin headwinds, sits alongside similar views from other large sell-side desks that have begun to model a deceleration in the latter half of 2027.
Margin dynamics in 2027 will hinge on labor cost inflation, input prices, and the degree to which corporations can pass incremental costs to consumers without demand destruction. The Federal Reserve's path after its 2026 rate cuts will also shape borrowing costs and thus the expense side of income statements. UBS sees the current consensus on perpetual earnings growth as vulnerable to a reset when macroeconomic conditions tighten.
UBS's positioning on equities has remained constructive through mid-2026, with Baweja and his team forecasting continued gains into year-end before the outlook turns less certain. The firm is actively stress-testing its bull case against near-term recession and profit compression scenarios.
Margin pressure in 2027 would represent a 12-to-18 month deceleration from the current earnings if it materializes. The risk Baweja flagged does not assume a hard landing or earnings recession, only a normalization of profit margins from current levels. Investors hedging against that outcome have begun rotating into defensive sectors and higher-quality credit even as growth stocks extend their gains.
