UBS Global Research raised its year-end target price for the S&P 500 index from the previously estimated 5600 points to 5850 points on Tuesday, citing corporate profit growth, favorable macroeconomic background, and Federal Reserve interest rate cuts.
UBS has also raised the target price for the S&P 500 index by the end of 2025 from the previously estimated 6000 points to 6400 points. This means that the S&P 500 index is expected to rise another 10% in the next 15 months.
The US stock market closed lower on Tuesday, led by a 1% decline in the tech focused Nasdaq index, as chip stocks fell due to demand concerns, while the energy sector plummeted 3% due to a drop in oil prices. As of the close, the S&P 500 index fell 44.59 points, or 0.76%, to 5815.26 points.
On Monday of this week, the S&P 500 index closed at a historic high of 5859.85 points, and the index has risen nearly 23% so far this year.
Multiple 'tailwinds'
In terms of economic growth in the United States, UBS economists expect nominal GDP growth of 3.7% and real GDP growth of 1.6% by 2025, both of which are in line with long-term averages.
In addition, UBS believes that the prospect of loose monetary policy will benefit American businesses.
A rate cut should be able to reduce interest expenses and default risks for (companies), thereby boosting earnings per share and valuations, "said UBS analysts led by Jonathan Golub. The financial situation shows reduced pressure/increased liquidity, which is favorable for (corporate) valuation
The Federal Reserve announced a significant 50 basis point interest rate cut in September, marking the beginning of an expected series of rate cuts. Federal Reserve Chairman Powell stated that the central bank's decision to cut interest rates by 50 basis points at once, instead of the usual 25 basis points, is intended to demonstrate its determination to maintain low unemployment rates in the face of slowing inflation.
UBS expects that by 2026, the Federal Reserve will cumulatively cut interest rates by 250 basis points, and has stated that a significant decrease in interest rates could increase corporate profit margins by 20 basis points.
UBS also stated that the strength of technology stocks may further boost the S&P 500 index.
However, UBS also pointed out that its outlook for the US stock market is facing downside risks, emphasizing that if US inflation accelerates again, it may prompt the Federal Reserve to reconsider interest rate cuts.