UBS has once again increased its target for the S&P 500 Index to 5400 points, suggesting an additional 6% growth potential from the closing price of 5088 points last Friday. This adjustment marks UBS's second revision of its target price, having previously set it at 4850 points on December 11 last year and then raising it to 5150 points on January 16.
Jonathan Golub, a strategist at UBS, highlighted in the latest report that the previous optimism for U.S. stocks might have been understated. He pointed to the strong U.S. economy and rising inflation, driven by robust demand, as positive factors for stock prices.
UBS also upgraded its earnings per share (EPS) forecasts and implied growth projections for the next two years. The firm increased its EPS expectations from $235 to $240 for 2024 and from $250 to $255 for 2025, projecting growth rates of 9.1% and 6.3%, respectively, for these years.
Reasons for the Upward Revision
UBS provided two main reasons for the adjustment. First, inflation driven by demand is beneficial for stock prices and corporate earnings:
- Higher inflation typically favors stock prices. Despite market sell-offs last week due to stronger-than-expected CPI and PPI reports, UBS's research suggests that this demand-driven inflation is constructive for future returns.
- Increased inflation implies enhanced pricing power, which is favorable for profit margins. Since the start of the earnings season, EPS forecasts for the fourth quarter have been on the rise, with the potential for a 10.8% EPS growth rate in the fourth quarter if the remaining period exceeds expectations.
Second, a strong economy fuels momentum for U.S. stocks. UBS cited several indicators of economic strength:
- Market forecasts for 2024 GDP have been increasing since August last year.
- Although the U.S. ISM Index remains in contraction territory, it has shown improvement, with new orders and prices paid moving into a clear expansion zone.
- Nonfarm payrolls in January saw a significant increase of 353,000, the largest gain since January 2023.
- Recent relaxation of lending standards is a positive sign for the economy.
- The U.S. Consumer Confidence Index has risen for the third consecutive month, reaching its highest level since 2021.
- Economists estimate a 45% chance of recession in the next 12 months, down from 50% in December last year and 65% in June.
Furthermore, UBS shifted its stance on financial stocks from neutral to overweight, adjusting its rating on healthcare stocks to neutral. Given the continued economic strength, the firm sees greater opportunities in cyclical sectors, with financial stocks benefiting from rising interest rates, a revival in M&A activities, and relaxed lending standards.
