UBS sees S&P 500 rising to 5,200 in soft-landing base-case for stocks
UBS projects the S&P 500 (SP500) (NYSEARCA:SPY) (IVV) (VOO) riding about 2% higher from current levels in its base case of a soft landing for the U.S. economy, but the benchmark could tumble more than 10% in a bear case that sees the 10-year Treasury yield (US10Y) soaring further.
The brokerage in a Friday note outlined three scenarios for US equities and the 10-year Treasury yield (US10Y) after the 10Y yield jumped 50 bps and the S&P 500 dropped ~5% from its peak during April trade. Hotter-than-expected inflation data, the Federal Reserve’s “inclination” to keep interest rates higher for longer, and escalating conflict in the Middle East stoked the large swings, it said.
Early Monday, the stock benchmark was at 5,099 and the 10-year yield was 4.64% (TBT) (TLT).
The base case sees the S&P 500 rising to 5,200 by year-end, and the 10-year yield falling to 3.85%. UBS expects inflation to fall to 3% by the end of the third quarter, largely driven by a pullback in shelter inflation with rent prices declining.
“Although Federal Reserve officials have indicated there is no urgency to cut interest rates, we think they will be able to make a first reduction in September. Meanwhile, we think the conflict in the Middle East will stay geographically contained,” Mark Haefele, chief investment officer at UBS Global Wealth Management, said in the note.
Bear case
The bear case has the S&P 500 (SP500) falling to 4,400, a roughly 14% slide from current levels, and the 10-year yield (US10Y) up at 6%. That scenario would come from a mix of US growth being “too good,” fiscal policy concerns, and a commodity price spike. First-quarter GDP growth at 1.6% was largely driven by higher imports and lower inventories, rather than weak final domestic sales, UBS said.
“If US economic growth stays strong and inflation above target, the Fed may need to raise interest rates further and investors may need to reassess their estimates of US trend rates of growth. This could contribute to higher real yields on longer-term bonds.”
Meanwhile, the undersupplied global oil market could see Brent crude oil prices (CO1:COM) rising beyond $100/bbl if oil flows through the Strait of Hormuz are disrupted or if major oil production facilities are attacked, UBS said.
Bull case
Its bull case call has the S&P 500 rising toward 5,500 despite the 10-year yield moving up to 5%.
“A bull case scenario would depend on optimism about artificial intelligence building further, at the same time as US growth stays robust and inflation resumes a downward trajectory,” Haefele said.