UBS sees S&P 500 at 2,900 by year-end 2018
The balance of risks for US equities is skewed to the upside, UBS said in an equity strategy note, as it targets a year-end 2018 level of 2,900 for the S&P 500.
The bank reckons the market can move higher next year, with a base case scenario of 2,900 and an upside case that assumes 3,300 for the S&P 500 if a tax cut is passed.
“We think our upside case, based on Congress delivering a tax cut, is more likely than our downside scenario and upside potential (S&P 500 at 3,300) outweighs the downside case by 2x.
“As the Fed continues to hike, equity valuations are seemingly pricing in higher rates, but not pricing higher expected medium-term profit growth or lower fundamental earnings volatility. Thus, we see opportunities to position for risk-adjusted growth plus yield with a focus on four broader themes that can fuel divergence in 2018 and beyond: 1) demographics; 2) corporate versus consumer spending; 3) margins; and 4) tax impacts.”
UBS’s upside case assumes earnings per share gets a further 10% boost driven by a 25% tax rate (+6.5%), repatriation (+2%) and a GDP lift (+1.6%). Meanwhile, the downside case of 2,200 assumes the Fed hikes as growth slows, the price-to-earnings ratio contracts by 3x and EPS falls 3%.
“Congress is motivated to act before midterm elections while the Fed usually reacts to slower growth; so we think our upside case is more likely,” it said.
UBS pointed out that so far, 2017 has been a year of better and more synchronised US/global growth, as financial conditions have remained easy and earnings have grown 10%. As a result, around half of the S&P 500 rally year-to-date has been from earnings and half from multiple expansion.
“In our view, the markers for the end of a bull market are largely absent and the drivers for further upside are still in place.”
The S&P 500 closed on Tuesday at 2,579.