UBS raises S&P 500 price target amid growing economy, strong profits

Published Fri, Apr 16 20218:48 AM EDTUpdated Fri, Apr 16 20219:31 AM EDT

Even with the stock market hitting a succession of new highs, there's still plenty of room to run, according to a new forecast from UBS. At the core of the firm's optimism is a belief that surging profits coupled with low inflation and mostly business-friendly policy will guide the market higher. "While investing at all-time highs may be daunting for some, we believe there is more upside ahead," UBS analysts said in a note to clients. "Following two rounds of stimulus deployed in the quarter and the ongoing vaccination effort, there is growing evidence that U.S. economic activity is picking up. The latest jobs data, business sentiment readings, and retail sales all point to a strong recovery," they said. The Wall Street bank has raised its forecast for the S & P 500, taking it from the current 4,200, which is only 30 points away, and up to 4,400. The new target implies a 5.5% gain from Thursday's close. That comes even as the S & P 500 already has jumped 11% in 2021 and is up about 50% from the same time a year ago, a time when the market was in the early stages of a pandemic-induced plunge. This year's rise has been led by cyclical stocks, including some of the sectors that lagged the broader market during the 2020 rally. Energy has been the biggest percentage gainer with a 29% increase, but it comprises just 2.7% of the index. Financials are up 19%, while communication services, industrials and real estate all are up more than 13%. In its forecast, UBS sees leadership in consumer discretionary, energy, financials and industrials. The firm also likes value over growth, and small- and mid-caps over large-caps. One reason for the bank's enthusiasm is a belief in robust profit growth , with expectations of a possible 30% increase in first-quarter earnings per share, full-year gains of 31% and that continuing into 2022 with another 12% run higher. The firm also isn't worried about the impact inflation might have on those profits. "While some companies may have higher-than-expected costs in the quarter and possibly for the full year, we don't think inflationary pressures threaten profit margins more broadly," the strategists said. Finally, despite fears that the Biden administration's tax proposals could hamper business activity, UBS doesn't see as big a threat. In fact, it expects the White House to settle on a 25% tax rate for corporations that would be higher than the current 21%, but not as bad as the 28% on the table now. "Assuming taxes on overseas profits and book income rise as Biden has proposed, this would only result in a 4% one-time hit on S & P 500 earnings, and it is already reflected in our 2022 forecast," the firm said. "More importantly, a very accommodative Fed and significant fiscal stimulus should continue to help economic momentum gather strength." The Fed has pledged to keep interest rates low until the economic recovery is complete. The White House, meanwhile, already has ushered through one major stimulus package and has more than $2 trillion in infrastructure spending currently on the table.

Traders on the New York Stock Exchange.

Source: NYSE

Even with the stock market hitting a succession of new highs, there's still plenty of room to run, according to a new forecast from UBS.

At the core of the firm's optimism is a belief that surging profits coupled with low inflation and mostly business-friendly policy will guide the market higher.

"While investing at all-time highs may be daunting for some, we believe there is more upside ahead," UBS analysts said in a note to clients.

"Following two rounds of stimulus deployed in the quarter and the ongoing vaccination effort, there is growing evidence that U.S. economic activity is picking up. The latest jobs data, business sentiment readings, and retail sales all point to a strong recovery," they said.