(Bloomberg) -- The rebound in stocks since Christmas has been breathtaking. Sentiment among Wall Street analysts is being repaired with similar speed.
The latest example is Keith Parker at UBS Group AG. The strategist in January slashed his 2019 forecast for the S&P 500 from the second-highest among those tracked by Bloomberg to below consensus. Now, he says the benchmark will climb to new highs by the end of June, approaching his year-end target of 2,950. The index recently traded close to 2,805, about 4 percent below the record 2,930 reached in September.
A lot of things have changed this year, particularly the Federal Reserve. After raising interest rates in December in the face of one of the bull market’s worst sell-offs, the central bank has tempered its stance on monetary policy. In keeping rates unchanged in January, Fed officials indicated they will be “patient,” a sign to many they’d put rate hikes on hold and were prepared to be more flexible on shrinking the balance sheet.
“A more ‘patient’ Fed helped turn risk sentiment,” Parker wrote in a note to clients Monday. “With the Fed providing a key circuit breaker, we see U.S. equities hitting new highs in the second quarter assuming a positive outcome from U.S.-China trade talks and a recovery in U.S./global growth.”
Parker is the latest strategist floating the idea of record highs as the S&P 500 is off to the best start of a year in three decades. Earlier this month, Savita Subramanian at Bank of America (NYSE:BAC) pinned the hope on a trade deal between the U.S. and China while Tony Dwyer at Canaccord Genuity highlighted broadening market momentum as evidence in support of a sustained rally.
UBS economists expect the Fed to end the Treasury runoff in July. That alone would add 1.5 percent to the S&P 500’s price-earnings ratio as investors become more willing to pay up for risky assets such as equities, Parker estimated.
Moreover, implied volatility, or perceived risk, in the bond market has collapsed to record lows while the Cboe Volatility Index, an options gauge for the S&P 500 known as the VIX, stayed relatively elevated. Historically, that’s a bullish sign for stocks, UBS found. As the firm’s data showed, the S&P 500 has tended to rise 10 percent on average over the next six months when equity volatility relative to the bond market has been as high as it is now.
The Fed has shown support for the financial market, but money managers continue to be skeptical about stocks, an indication to Parker that the rally has further to go. From hedge funds to computer-driven traders, their exposure has held one standard deviation below historic average, according to UBS data.
“Investors have money on the sidelines they can put to work,” Parker said. “Positioning has risen from the extreme lows, but it is still supportive of further equity upside, in the event of positive catalysts for equities.”