Three reasons why UBS believes the S&P 500 can rally to 5,000

Published Tue, Aug 31 202112:29 PM EDTUpdated Tue, Aug 31 20211:01 PM EDT

Jesse Pound @/in/jesse-pound @jesserpound

The S & P 500 is up 20% year to date and on the verge of notching its seventh-straight positive month, but the broad index's run is far from over, according to UBS. Mark Haefele, chief investment officer for UBS' global wealth management, said in a note to clients that the S & P 500 was on track to hit 5,000 by the end of 2022 — a gain of 10% from where the market was trading Tuesday. The note from UBS laid out three reasons for a continued bull market. 1. Earnings strength Corporate America is wrapping up its second-quarter earnings season, and the results largely topped the high expectations that Wall Street analysts and strategists had entering July. Those strong earnings have led to higher expectations for future quarters, as well. That means that the price-to-earnings ratio, a key valuation metric for stocks, no longer looks as eye-popping as it did earlier this year. Additionally, the healthy corporate profits mean that the stock market is on firm footing to take another step higher, according to UBS. "Earnings are now nearly 30% higher than pre-pandemic levels, which helps explain why stocks have performed so well. There are also good reasons to expect continued profit growth ahead," Haefele said. His reasons for optimism include strong household balance sheets and low interest payments, which should result in a strong consumer sector in the U.S. 2. Fed support On Friday, Federal Reserve Chairman Jerome Powell said that the central bank would likely begin to reduce its asset purchases by the end of the year but stressed that slowing those purchases should not be seen as a signal about when the Fed would hike rates. That caution means the Fed could keep rates at historically low levels through 2022, which should be good for stocks and other financial markets, UBS said. "The Fed's gradual approach aligns with our view that policymakers are eager to avoid a repeat of the 2013 taper tantrum, when unexpected talk of tightening caused a sharp rise in yields and a fall in stocks," the UBS note said. 3. Normalization continues The spread of the delta variant of Covid-19 has slowed the global economic recovery. However, Haefele said there are signs that the variant won't cause the major disruptions seen earlier in the pandemic, pointing to recent data out of China. "We were encouraged last week by news that China had reported zero domestic COVID-19 cases for the first time since July. ... These developments reinforce our view that the recent setbacks in China's efforts to combat the pandemic will be overcome without a significant disruption to international supply chains or a boost to global inflation," the note said. Haefele also noted that vaccinations appear to be holding down deaths and hospitalizations relative to high case rates, which could keep some policymakers from instituting strict lockdowns due to delta. To be sure, UBS' view of continued gains for stocks is not shared by all major Wall Street shops. Morgan Stanley's Mike Wilson, for example, has warned repeatedly that the stock market is overdue for a correction of 10% or more. -CNBC's Michael Bloom contributed to this report.

A woman takes a selfie with the 'Charging Bull' statue on Feb.17, 2021 in New York

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The S&P 500 is up 20% year to date and on the verge of notching its seventh-straight positive month, but the broad index's run is far from over, according to UBS.