UBS raises 2018 S&P 500 forecast three trading days into the year, now sees 18% surge

Key Points
  • UBS raises its 2018 S&P 500 target to 3,150 because of the corporate tax cut.
  • S&P 500 seen climbing also because of improved corporate earnings and buybacks.
  • The Dow Jones industrial average surged past 25,000 on Thursday and the S&P is above 2,700.
Trader Peter Tuchman reacts as the final day of trading for the year draws to a close at the New York Stock Exchange (NYSE) in Manhattan, New York, U.S., December 29, 2017.
Andrew Kelly | Reuters

The could surge 18 percent this year, according to UBS, which raised its 2018 target to 3,150, the highest on Wall Street, only three trading days into the year.

The Dow Jones industrial average already crossed 25,000 on Thursday morning and closed above that level after a strong jobs report. The broader S&P closed at 2723.99 on Thursday after rising nearly 20 percent last year.

The S&P 500's gain on the year will be 17.8 percent according to the new UBS target and based on the benchmark's closing value of 2017. Taking into account the rally to start 2018, the index will rise 15.5 percent from here, according to the UBS target. The firm's previous 2018 forecast for the S&P 500 was 2,900.

"We assume solid growth," said Keith Parker, the chief U.S. equity strategist at UBS, in an appearance Thursday on CNBC's "Halftime Report." "We do expect a large pickup in buybacks and M&A."

Tax cuts for corporations will fuel earnings growth and were the reason for the more upbeat forecast, the UBS analysts said in a note Thursday. They raised their S&P earnings-per-share forecast for the year to $157, which would be an 18 percent year-over-year gain.

About half (8.5 percentage points) should come from pretax income growth, the analysts said, while the tax plan will add another 7.2 percentage points to that and share buybacks and merger activity will make up another 2.5 points.

"We see corporate spending picking up, particularly around productivity, benefitting from lower taxes and a potential pick up in aggregate demand," Parker wrote in the Thursday note. "At the same time, we expect consumer spending to remain solid, though the drop in the savings rate remains a concern for us."

— CNBC's Patricia Martell contributed reporting