S&P 500 to hit the 5,000 level by the end of next year – UBS

US equities have now hit 50 all-time highs in 2021, ending last week up 20% year-to-date. Economists at UBS think strong earnings and supportive policy will push the S&P 500 higher, led by cyclical sectors like energy and financials.

The backdrop for equities remains positive

“The S&P’s rally has been underpinned by robust earnings growth, and this run of strength should continue. We expect revenues to be supported by robust consumer and business spending. Consumer balance sheets are the strongest in decades after households amassed significant savings over the last year. Meanwhile, businesses are struggling to keep up with demand, suggesting a long pipeline of investment projects and a need to rebuild inventories, both of which are supportive for the growth outlook.”

“Top Federal Reserve officials at last week’s Jackson Hole symposium restated that policy will remain supportive, even after bond purchases are scaled back. The Fed’s gradual approach aligns with our view that policymakers are eager to avoid a repeat of the 2013 taper tantrum. Our base case is that the Fed will reduce its asset purchases, currently running at $120bn per month, by $15bn each month starting in December.”

“Progress toward economic normalization – though uneven – continues. Globally, the pace of vaccinations accelerated last week to around 38 million daily, below the peak in June of 43 million, but up from around 20 million in May, according to Our World in Data. Meanwhile, studies continued to show that vaccinations are weakening the link between infections, hospitalizations, and deaths.”

“Our S&P 500 targets are 4,800 for June 2022 and 5,000 for end-2022. At a sector level we prefer financials, which should be well-supported by rising 10-year Treasury yields, and energy, which we expect to benefit from a further rise in oil prices in the second half of the year. We like Japanese stocks as their revenues are highly exposed to the global recovery.”