US Equities Poised for Further Gains Despite Short-Term Volatility: UBS
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UBS maintains a positive outlook on US equities and anticipates further gains for the S&P 500, predicting a target of 6,600 by the end of 2025, according to a note published by its Chief Investment Office on Thursday.
The S&P 500 has experienced a three-day decline this week, its longest losing streak since early September, as investor sentiment has been dampened by rising Treasury yields and uncertainty surrounding the US presidential election. The benchmark 10-year US Treasury yield has climbed 14 basis points over the past three sessions, fueled by a combination of factors including the potential for a more measured pace of Federal Reserve interest rate cuts, geopolitical concerns, and election-related uncertainty.
While UBS acknowledges the potential for increased market volatility in the lead-up to the election, they emphasize that this should not overshadow the underlying strength of the US economy and corporate earnings.
"We maintain a positive outlook on US equities," the Swiss bank states. "The third-quarter results so far have suggested continued solid earnings momentum, with guidance for the fourth quarter slightly better than normal seasonal patterns. We continue to expect corporate profits to grow 5-7% in the third quarter, contributing to the 11% earnings growth we expect for full year 2024 as the US economy proves to be resilient amid higher-than-expected income growth and household spending."
The note also highlights the Fed's continued commitment to easing monetary policy, although at a potentially more measured pace than initially anticipated. Despite recent strong economic data, the Fed's Beige Book released this week indicated mixed economic activity and consumer spending trends, suggesting that the central bank is likely to prioritize maintaining economic growth while inflation continues to moderate.
UBS expects a further 150 basis points of rate cuts by the end of next year, as the Fed brings policy closer to a neutral level.
The report also cites the continued strong demand for artificial intelligence (AI) as a key driver of growth. Recent results from TSMC and SK Hynix point to sustained AI demand, bolstering the investment thesis for this sector.
"We see room for US stocks to move higher," concludes UBS. "We hold an Attractive view on the IT sector, as well as the utilities, financials, consumer discretionary, and communication services sectors."