UBS sees the S&P 500 rising above 5,000 in the first half of 2022 before reversing

Published Mon, Dec 6 20219:48 AM EST

The S & P 500 should rally past 5,000 in the first half of 2022, then pull back in the second half as Covid, the Federal Reserve and corporate earnings drive market action through next year, according to UBS. UBS set a target of 4,650 on the S & P 500 for the end of 2021, 2.5% higher than the index's close at 4,538.43 on Friday. "We see volatility staying elevated into the FOMC meeting (Dec 15), as inflation is an overhang, and as the market awaits more information on the omicron variant," UBS chief equity strategist Keith Parker said in a note Monday. The firm then sees the S & P 500 peaking at more than 5,000 in the first half of next year before closing the year at 4850. "The Fed outlook will be critical for equities in 2022 and our machine learning model shows that the Fed funds path is currently the most important driver of markets," Parker wrote. Recent comments by Fed officials suggest the central bank is poised to speed up the tapering of its pandemic-era asset-purchase program, setting up rate hikes to begin as soon as next spring. UBS believes stocks will rally into the first hike next year. The S & P 500 has gained 12.5% on average since 1950 in the 12 months prior to the Fed's first rate hike, according to the firm's analysis. Plus, an improving Covid backdrop should provide tailwinds for the market, UBS said. "COVID cases continuing to fall through the early summer, and more importantly a falling death rate, should boost equities in H1 too," Parker said. After the first hike, inflation and the pace of the remaining rate hikes are key for equities, according to UBS. Cost pressures and a slowdown in earnings growth will likely drive the S & P 500 lower into the end of 2022, the firm said. "Continued tightening of financial conditions coupled with weak earnings momentum and probable H2 EPS downgrades likely to lead to a more meaningful derating," Parker said. UBS noted there are "still sizeable uncertainties" around the pandemic, Fed actions and corporate results that could impact the firm's outlook. —CNBC's Michael Bloom contributed reporting.

The Wall St. sign is seen near the New York Stock Exchange (NYSE) in New York City, May 4, 2021.

Brendan McDermid | Reuters