UBS analysts believe stocks are poised for a rally, citing three main reasons: a supportive macro environment, robust profit growth, and AI spending unlocking value.
First, UBS highlights a supportive macro environment, noting, "data over the past few weeks shows the economy is cooling, which increases the likelihood of a Fed pivot before year-end."
Real GDP for Q1 2024 was revised down to 1.3%, indicating a slowing economy that could prompt rate cuts. UBS adds that additionally, weaker-than-expected retail sales and lower-than-anticipated inflation suggest "a healthy deceleration" that might lead to "further disinflation," enabling potential Fed rate cuts of 50 basis points by year-end.
Second, profit growth remains strong. UBS reports that first-quarter earnings were better than expected, with positive revisions in guidance and earnings broadening beyond the top tech firms.
"Trends in artificial intelligence (AI) were particularly robust," boosting sectors like semiconductors, utilities, industrials, and materials. Despite some misses, like Salesforce (NYSE:CRM) and Dell (NYSE:DELL), UBS views these as isolated events, maintaining optimism with increased S&P 500 EPS estimates for 2024 and 2025.
Lastly, they note that AI spending continues to unlock value. UBS points to Nvidia (NASDAQ:NVDA)'s strong earnings, particularly its data center business, which grew over 400% in Q1 2024. UBS believes investment in AI will generate significant downstream revenue, driving future growth across the AI value chain.
In summary, UBS asserts that favorable macro conditions, strong earnings growth, and AI advancements position stocks for a rally, raising their year-end S&P 500 target to 5,500.