US Equities Supported by No-Landing Economy: UBS
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The US economy is headed for a "no landing" scenario, characterized by controlled inflation and sustained growth, according to a note published by UBS on Friday. This outlook has prompted the Swiss bank to upgrade US equities to "Attractive" and predict double-digit returns for the S&P 500 by the end of 2025.
The Federal Reserve's aggressive interest rate hikes throughout 2022 sparked widespread debate about a potential recession. However, recent economic data paints a more optimistic picture, with inflation cooling and the labor market exhibiting unexpected resilience.
"The labor market is more resilient than expected," says UBS. "The last nonfarm payrolls came in well above consensus forecast, lifting the three-month average payroll gain to 186,000, healthy enough to absorb the growth in labor supply."
UBS highlights several key factors contributing to this positive outlook:
Cooling Inflation: Despite some monthly fluctuations, the overall trend points towards disinflation. The latest PCE index readings, a crucial gauge for the Fed, indicate a steady decline in inflation toward the central bank's target.
Robust Labor Market: The latest nonfarm payrolls came in well above consensus forecast, lifting the three-month average payroll gain to 186,000. This resilience allows the economy to absorb new workers and maintain healthy wage growth.
Consumer Spending Power: Despite inflationary pressures, retail sales still grow at 0.4% and exceed market expectations. This is consistent with healthy household balance sheets and income growth.
While the upcoming US presidential election could introduce some volatility, UBS believes its impact on the overall economic trajectory will be limited. The bank expects the Fed to continue cutting rates, providing further support to the economic expansion.
"The election is taking place against a backdrop of Fed rate cuts, US economic momentum, and supportive secular trends like artificial intelligence," UBS points out. "We would caution against kneejerk or simplistic assumptions of equity market outcomes based on individual policies."
This outlook has prompted UBS to set a target of 6,600 for the S&P 500 by the end of 2025, implying a potential return of 13-14% from current levels. This positive sentiment extends to the global market, with the bank also upgrading the MSCI All Country World index to "Attractive."