Recent weeks have seen increased volatility in equity markets, primarily influenced by evolving expectations regarding Federal Reserve policy rates and geopolitical factors following the Israel-Hamas war.
The upcoming focus is expected to shift towards corporate fundamentals as the third-quarter earnings season for the S&P 500 commences.
UBS analysts believe that the profit recession has concluded, and the U.S. economy is on track for a relatively gentle slowdown. This positive outlook is driven by robust consumer activity, moderating inflation, and solid growth.
After experiencing three consecutive quarters of year-over-year declines, it is anticipated that the third quarter of 2023 will mark a return to growth for S&P 500 earnings per share (EPS), with profits expected to increase by 3-4%. This outlook contrasts with the consensus forecast, which suggests flat EPS growth for the third quarter.
The investment banking giant forecasts that S&P 500 EPS will remain steady at $220 for the full year 2023 and then surge by 9% year-over-year, reaching $240 in 2024.
However, the anticipated rise in interest rates and the potential for slower economic growth in the coming months have led to adjusted expectations for the S&P 500. As a result, the new price targets are set at 4,500 for June 2024 and 4,700 for December 2024.
“Even with higher rates, we expect consumer balance sheets to remain healthy, since 90% of consumer debt is with lower fixed interest rates. But there are risks to consumer spending, including the resumption of student loan repayments and higher oil prices. Furthermore, labor renegotiations, a potential government shutdown, and geopolitical conflicts add to economic uncertainty,” UBS analysts wrote in a client note.
The bank was previously expecting the S&P 500 to hit 4,700 by June 2024.
“We maintain a least preferred stance on US equities relative to other regions, yet we think the risk-reward is becoming more attractive on a 12-month time horizon, since valuations have pulled back. We hold a neutral view globally on stocks and recommend investors focus on areas that have lagged this year's rally, such as emerging market equities.”