UBS expects AI-related capex to approach USD 1 trillion next year, arguing capacity constraints across the AI supply chain support further gains in AI-linked equities even as concerns about capex sustainability persist. The bank sees a broadening rally as cyclical sectors catch up, aided by easing energy costs and improved supply visibility as Strait of Hormuz traffic gradually resumes. UBS does not expect the Federal Reserve to hike rates this year, viewing Fed Chair Kevin Warsh's task force approach as a signal of a slower near term policy reaction, while any further ECB tightening is seen as delayed and data dependent. The bank retains a positive six month outlook for global equities despite a cautious start to July tied to renewed friction in US-Iran talks.--- UBS stays bullish on equities after global stocks posted their best quarter in six years, expecting AI capex near USD 1tn and a broadening rally into cyclicals. Summary:The MSCI All Country World Index gained 14.5% in the second quarter, its best quarterly performance in six yearsThe Philadelphia Semiconductor Index rallied 87.8% over the quarter, its best everUBS expects annual AI related capital expenditure to rise to nearly USD 1 trillion next yearThe bank sees capacity constraints across the AI supply chain supporting further gains in AI linked stocksEasing energy prices and gradually resuming Strait of Hormuz traffic are seen supporting a catch up in cyclical sectorsUBS does not expect the Federal Reserve to hike rates this year and sees Kevin Warsh's task forces as a signal of a slower policy reactionFurther ECB tightening is expected to be delayed, limited and data dependentUBS retains a positive outlook for global equities and expects market leadership to broadenGlobal equities closed out the second quarter with their strongest performance in six years, and UBS says the rally has further to run over the next six months. The MSCI All Country World Index gained 14.5% over the three month period, while semiconductor stocks delivered their best quarter on record, with the Philadelphia Semiconductor Index surging 87.8%. Markets entered July in a more cautious mood after reports that US-Iran talks hit fresh hurdles, but UBS expects stocks to continue rising through the second half of the year.Artificial intelligence remains the bank's central pillar for further gains. Despite lingering concerns about whether AI related capital spending can be sustained, recent equity capital raises by megacap technology companies suggest hyperscalers are still in build out mode. UBS forecasts annual AI related capex will climb to nearly USD 1 trillion next year, and argues that spending at that scale, combined with ongoing capacity constraints across the AI supply chain, should keep driving gains in AI linked stocks even as capex growth risks have increased.The bank also sees scope for a broader rally as cyclical sectors catch up. While renewed friction in US-Iran peace talks could weigh on sentiment in the near term, UBS expects the gradual resumption of shipping through the Strait of Hormuz and lower energy prices to ease cost pressures and improve supply visibility, supporting a recovery across cyclical sectors globally. In the US specifically, a resilient economy, solid labour market and strong credit creation are expected to bolster earnings outside the AI complex.Central bank policy is not seen as a major obstacle to further gains. UBS does not expect the Federal Reserve to raise rates this year, citing moderating inflation, a labour market that is not overheating, and an expected re-emergence of softer growth conditions in the second half of the year. The bank also points to Fed Chair Kevin Warsh's introduction of multiple internal task forces as a signal that the central bank's policy reaction is likely to slow in the near term. In Europe, UBS expects recent inflation data and the energy backdrop to reduce pressure for extended tightening, with any further ECB hikes likely to be delayed, limited in scope and dependent on incoming data.Taken together, UBS is maintaining a positive outlook for global equities and expects market leadership to broaden beyond the AI trade as the next phase of the rally unfolds. This article was written by Eamonn Sheridan at investinglive.com.