By Investing.com — UBS strategists maintained their S&P 500 price target of 6,200 by June 2025 on Monday and reaffirmed a positive outlook on AI beneficiaries and quality stocks.
U.S. equities entered the third-quarter earnings season on strong footing, with the S&P 500 reaching its 45th all-time high of the year on Friday after five consecutive weeks of gains. The benchmark index is now up nearly 22% since the beginning of the year.
Strategists said volatility can be expected in the coming weeks as investors review company financials and future guidance. Moreover, the U.S. election is drawing near, and geopolitical risks in the Middle East remain elevated.
UBS projects that headline S&P 500 earnings per share (EPS) growth for the September quarter will range between 5% and 7%, a slowdown from the 11% growth in the second quarter, largely due to lower oil and gasoline prices. However, their 2024 full-year earnings growth forecast of 11% remains unchanged. The bank expects the Q3 results to confirm healthy corporate profit growth.
Meanwhile, the macro environment remains favorable, with overall U.S. economic activity staying solid, despite a recent slowdown in lower-end consumer spending.
UBS strategists expect economic growth to remain healthy, highlighting low job layoffs and an encouraging ratio of unfilled jobs to the number of unemployed. Key labor sectors, such as construction and manufacturing, are not showing signs of distress.
“With the Federal Reserve having started its rate-cutting cycle, the U.S. economy should get a further boost from lower interest rates, with improving credit card debt and business loans,” strategists said in a note.
Similar to the second quarter, UBS sees Q3 profit growth in the S&P 500 extending beyond the largest growth companies. Growth rates for the “Magnificent 7” are forecast to remain robust at around 20% year over year, driven by continued investment and monetization in AI.
Strategists said management guidance will be a crucial factor influencing share prices during the earnings season, and they believe the risks of guidance disappointments are no higher than usual.
“We expect executives to sound a positive note on the prospects for profit growth, consistent with the recent easing in bank lending standards, which tends to be a good leading indicator for profit growth,” they wrote.
In terms of valuations, strategists note that they remain high but are reasonable given the current economic backdrop.