- UBS Global Wealth Management expects the S&P 500 to climb to 5,000 by the end of 2022, an increase of 12% from current levels.
- The company expects the broad index to rise as corporate earnings continue to grow.
- Rising COVID cases may slow economic activity, but not enough to derail the bull run in stocks.
The bull run in U.S. stocks is likely to extend into 2022, with the S&P 500 index rising to 5,000 by the end of next year, with corporate America’s earnings soaring already searing, according to UBS Global Wealth Management.
“Yes, the rally from the COVID-19 low in March 2020 was exceptional, but we believe there are more gains ahead of us. Solid economic and corporate earnings growth coupled with a still accommodating Fed means the environment for equities remains. “Favorable,” said David Lefkowitz, Head of Americas Equities, in a statement released on Monday.
On this basis, UBS has broadly set its target of 5,000 US shares for 2022. The forecast would leave the index 12% higher from Monday’s closing price. It also raised its S&P 500 projections for December 2021 and June 2022 to 4,600 and 4,800, respectively.
The S&P 500 traded record highs on Tuesday. This year it has added a number of new highs mainly as companies released better-than-expected earnings reports and earnings forecasts as the economy rebounds from COVID-19. According to UBS, 85% of S&P 500 companies exceeded Wall Street expectations for the second quarter, and earnings growth of 90% year over year was higher than forecast of an 80% increase.
“Despite some investor concerns about rising costs, revenue growth of 25% in the second quarter was robust enough to overwhelm cost pressures, and the S&P 500’s profit margins peaked for several decades for the quarter,” said Lefkowitz.
UBS revised its earnings per share estimates for S&P 500 companies, citing the favorable economic outlook. “Consumer accounts are the strongest in decades, after households accumulated trillions of trillions in savings last year. In addition, employment is rebounding and recent employment data has been better than expected the pandemic should sustained employment growth drive consumer spending soar, “Lefkowitz said.
UBS now sees earnings grow 45% in 2021 to $ 207 per share and an additional 10% in 2022 to $ 227 per share. The profit forecast for 2022 envisages a 4 to 5% burden from higher corporate taxes. The Biden government is proposing to raise the corporate tax rate from 21% to 28%. “These estimates are higher than the bottom-up consensus estimates, indicating further upward earnings revisions,” Lefkowitz said of the company’s earnings outlook.
He said the recent surge in COVID-19 cases could trigger some drop in activity, particularly in the travel and entertainment segments. A dent in economic growth should be modest, however, as the Delta variant cases in the US could peak by late August, following the pattern in some European countries that had earlier outbreaks.
In the meantime, the Federal Reserve should remain accommodating with monetary policy, UBS said. Investors were concerned that if inflation stays around multi-year highs, the Fed will hike rates, and this could dampen economic growth.
“But we believe the inflation story is changing” because commodity prices have stopped rising in recent months and there is “little” evidence that wage increases are broad-based, it said.
“This is crucial. Inflation could become more persistent and problematic if wage pressures lead to widespread price hikes. With the workforce still 5.7 million jobs below pre-pandemic levels, the labor market should ease sufficiently. “Keep inflationary pressures in check,” Lefkowitz said.