US stocks have more room to run even after the record highs made in recent weeks, according to a Tuesday note from UBS.
The bank raised its year-end S&P 500 price target to among the highest on Wall Street at 4,650, representing potential upside of 3% from current levels. UBS had a prior year-end target of 4,400. Additionally, UBS said it expects the S&P 500 to jump 7% to 4,850 by the end of 2022.
“Equities are likely to sell off at some point in coming weeks as investors brace for higher yields, taxes, slowing data, etc. But peak growth does not mean a deep slowdown is imminent,” UBS said, adding that its risk vs reward profile in the near-term is typical at this stage.
Here are the five reasons why UBS has turned even more bullish on stocks through the rest of 2021.
1. “A 10%+ rise in forward earnings [over] the next 6 months.”
“Q2 actual earnings are above consensus expectations for Q3, Q4, and Q1. Our model points to S&P EPS in Q3 10%+ above consensus and upgrades to out quarters will continue the strong earnings momentum, albeit at a less extreme pace,” UBS said.
2. “An eventual fall in COVID cases.”
“The pace of new cases peaked in early August, and could rise again, but vaccinations + immunity should mean cases eventually fall. Full reopening has been pushed out with the jump in related spending still to come,” UBS said.
3. “Still strong growth activity.”
“Growth peaked, but is still high and near-term growth is cheap. US GDP growth is still set to be more than 5% the next 3 quarters, inventories are still low and consumption growth is very strong. What happens after peak growth is the fear. But in our work, NTM EPS growth is relatively cheap and stocks cheap on PEG have had stronger earnings momentum,” UBS said.
4. “Much more fiscal spend than taxes.”
“Fiscal spend of more than $2 trillion is not fully priced, upside for select cyclicals. Fiscal sentiment has been a key driver of stocks. We assume ~$2 trillion of spending gets passed, but risks are seemingly to the upside, though still uncertain,” UBS said.
5. “The ability to absorb a 30-50bp rise in real yields.”
“Every 50bp rise in the 10y is a ~3% headwind to the P/E ratio but our work shows the S&P can absorb a 30-50bp rise in rates as equities didn’t re-rate up as yields fell in the summer. Equity internals are also pricing in higher rates, with a likely greater catch up for stocks positive geared to higher rates than a catch down for stocks hurt,” UBS said.