Despite concerns about the intensifying trade conflict between the U.S. and China, UBS analysts insist that market fundamentals in the world's largest economy remain strong.
In a note published Monday, strategists at the Swiss investment bank said that while investors should protect against any downside, it makes sense to stay invested in the S&P 500 on account of resilient earnings growth, low recession risk and cheap stock opportunities.
The fell 0.6% Friday, following a 2.5% decline in China's CSI 300 index, accompanied by reports that trade negotiations had stalled. The benchmark is down nearly 3% this month with some hefty bouts of selling after negative newsflow from the trade talks.
However, UBS predicts more gains on top of the 14% it's already risen this year. The analysts set a six-month target for the S&P of 2,950 points, around 3.2% higher than the current level.
"Despite the imposition of tariffs and difficult year-over-year comparisons, the first-quarter U.S. earnings season illustrated the health of the corporate profit cycle," the note from the investment research team stated.
UBS analysts expect a trade deal between the U.S. and China will be reached based on the prevalence of "economic self-interest," and therefore maintain a forecast for S&P 500 earnings per share (EPS) to rise 3% year-on-year in 2019, adding a further 7% in 2020.
U.S. real gross domestic product (GDP) confounded expectations in the first quarter to rise 3.2% on an annualized quarter-over-quarter basis, while unemployment recently dropped to 3.6%, its lowest reading in 50 years.
"The $20 trillion U.S. economy is large enough to absorb the threatened direct effects of tariffs without risking a recession," the analysts said.
"That said, a lasting and escalating trade dispute would have a chilling effect on investment spending that could represent a 0.75–1% hit to GDP."
Heightened tensions between Washington and Beijing do have the potential to undermine the U.S. economy and markets, and the UBS analysts would have expected a further 4.5% drag on earnings had the President Donald Trump administration followed through with all of its threatened tariffs last week. The U.S. on Friday delayed tariffs on cars and auto part imports for up to six months. The U.S. president has also threatened to put 25% tariffs on $325 billion in Chinese goods that remain untaxed.
However, UBS strategists stressed that given the likelihood of a deal, investors should stay the course but "maintain countercyclical positions as near-term volatility is likely to remain heightened."