UBS strategists expect S&P 500 earnings to rise 11% this year, driven by healthy economic growth and growing investment in artificial intelligence (AI).
The investment bank reiterated its optimism toward the market due to solid and broadening profit growth, disinflation, and a Fed pivot to rate cuts. This, coupled with rising AI infrastructure investments, has driven the S&P 500 to new record highs.
Despite cooling growth readings, strategists believe the economy is stable, supported by a robust labor market. Low initial jobless claims, 1.2 open jobs per unemployed worker, and rising real wages indicate continued consumer spending strength. Jobs are still being added in construction and manufacturing, key cyclical sectors, UBS highlighted.
In addition, while first-quarter inflation was higher than expected, it softened in the second quarter.
“We expect this disinflation trend to continue,” the UBS team noted.
“Pricing power for corporate America continues to moderate, wage pressures are easing, consumer inflation expectations remain well contained, and the shelter component of the government's inflation data should continue to moderate,” they added.
This, in turn, should pave the way for the Fed to begin cutting interest rates later in the year. UBS expects a total of two cuts in 2024, with the first one anticipated in September.
“With the Fed now in a position to cut rates in case economic growth falters, this should limit the scope of potential downside risks for stocks,” strategists continued.
Meanwhile, Q1 earnings results were better than expected, noted UBS, adding it was particularly impressed by the guidance and the fact that earnings per share (EPS) growth is beginning to broaden beyond the Magnificent 7 group.
AI trends were particularly strong, fueled by an increase in capital spending by the mega-cap companies.
“We think the underlying demand will remain robust as the tech companies jockey for the pole position in the emerging AI ecosystem, and companies across the economy look to deploy AI tools into their business processes.”
As a result, UBS now sees S&P 500 EPS increasing by 11% in 2024 to $250 and by 6% in 2025 to $265, “which could prove to be conservative,” it noted. Overall, strategists believe the environment remains favorable for U.S. equities, recommending a full allocation to the asset class. Their S&P 500 targets are 5,500 for year-end 2024 and 5,600 for June 2025.