UBS Group’s global wealth management business has raised its year-end target for the S&P 500 index to 5,200, attributing this forecast to the increasing investment in artificial intelligence and robust company earnings.
Surge in AI Investment Propels S&P 500
The S&P 500, representing large-cap stocks in the U.S., surpassed the 5,100 mark with the help of AI beneficiary Nvidia Corp. The index reached a record closing high of 5087.03, as per FactSet data.
AI Arms Race Continues Unabated
David Lefkowitz, head of U.S. equities at UBS Global Wealth Management, highlighted the impact of AI advancements on the stock market. He mentioned that the AI arms race initiated by ChatGPT over a year ago is ongoing, leading to revised price targets and a neutral allocation to U.S. equities in their tactical asset allocation strategy.
Revised Targets and Economic Outlook
UBS’s new year-end target for the S&P 500 stands at 5,200, representing a significant increase from its previous projection. Additionally, the “upside scenario” for the U.S. equities index has been revised to 5,500 for December.
Despite mixed economic signals, UBS remains positive about U.S. equities due to factors such as robust economic growth, controlled inflation, expected rate cuts by the Federal Reserve, and the surge in AI investments. Lefkowitz anticipates three rate cuts in 2024, with the first one potentially starting in June.
The Federal Reserve’s benchmark interest rate currently lies within the range of 5.25% – 5.5%.
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UBS’s Market Predictions for 2024
According to UBS’s outlook for the S&P 500 this year, consumer spending is expected to remain robust due to favorable labor market conditions. The forecast hinges on low initial claims for unemployment insurance and continued job growth, particularly in sectors like manufacturing and construction.
Solid Performance Continues
The S&P 500 has already gained 6.9% year-to-date, building on its impressive 24.2% surge in 2023. Despite the strong performance of U.S. equities recently, UBS believes that the underlying market drivers will continue to be supportive. Improved fourth-quarter results and optimistic guidance from companies have contributed to this positive sentiment.
AI and Inflation Dynamics
In an optimistic scenario outlined by UBS, Artificial Intelligence (AI) is seen as a potential game-changer, driving productivity and earnings growth sooner and on a larger scale than expected by investors. Additionally, inflation is projected to ease at a quicker pace than initially anticipated in this bullish case for the S&P 500.
Caution Amid Elevated Indicators
While the overall outlook remains positive, UBS warns that certain sentiment and positioning indicators in the U.S. stock market are currently elevated. This heightened level of risk could lead to a minor pullback in the near future, presenting investors with an opportunity to enhance their equity holdings.
Current Market Performance
At midday on Friday, the U.S. stock market showed upward momentum, with the S&P 500 rising by 0.2%, the Dow Jones Industrial Average climbing 0.4%, and the Nasdaq Composite remaining relatively stable. All three major indices were on track to close the week with gains, according to FactSet data.
These dynamics suggest a mix of optimism and caution in the market, underpinned by strong fundamentals and potential challenges that investors should be mindful of in the coming months.