Investing.com -- UBS told investors in a note Thursday that the Federal Reserve's latest interest rate increase should not derail the equity rally, even as policymakers signaled more tightening to come.

The Fed unanimously raised its target range by 25 basis points to 3.75% to 4.00%, with Chair Kevin Warsh saying officials had "removed a dose of accommodation" and that broad financial conditions were hard to describe as restrictive.

He said economic activity was "expanding at a solid pace," while the central bank projected a "timelier return" of inflation to its 2% goal.

Despite the hawkish tone (16 of 18 officials now expect at least one more hike this year), UBS said much of the tightening is already priced in.

Markets had braced for nearly four increases over the cycle, versus UBS's forecast of two, and the reaction was contained, with the S&P 500 down 0.4% and the two-year Treasury yield up just 1 basis point on the day.

The bank believes the economic strength makes the tightening more manageable, pointing to the Fed's upgraded growth forecasts and strong August retail sales, which rose 1.2%. Continued AI investment provides further support, with UBS forecasting industry capital spending rising to $1.2 trillion in 2027 from $900 billion.

Strong earnings should also counter higher yields, UBS said, forecasting S&P 500 profit growth of 25% in 2026 and 14% in 2027. It remains positioned for further gains while bracing for near-term volatility, recommending diversified exposure and avoiding rate-sensitive concentration.