6400 points! UBS continues to raise expectations for US stocks next year

UBS expects the US stock market to hit a new high in 2025. The bank's strategist Jonathan Golub raised the target price of the 2025 S&P 500 index from 6,000 points to 6,400 points in a report released to clients on Tuesday. The new forecast means a 9.2% increase from Monday's closing price.

Golub notes that the favorable economic context is the catalyst for this change. “UBS economists expect US nominal GDP to grow by 3.7% in 2025, roughly in line with the long-term average,” he said. Furthermore, “interest rate cuts should reduce interest expenses and risk of default, thereby increasing earnings per share and valuation.”

Golub's appeal comes a day after the S&P 500 hit a record high, which has risen nearly 23% so far this year. The stock market has been rising strongly recently as investors expect the Federal Reserve to continue cutting interest rates in the coming months.

“In a non-recession environment, when the Federal Reserve cuts interest rates, the valuation of US stocks usually rises,” the strategist said. “Despite high valuations, we expect the price-earnings ratio to rise.”

Golub also stated, “A sharp drop in the federal funds rate may increase profit margins by 20 basis points by reducing interest expenses.”

According to the Chicago Mercantile Exchange Group's US Federal Reserve observation tool, traders expect the Fed to cut interest rates by 25 basis points in November and further cut interest rates by 25 basis points in December.

The Federal Reserve cut the benchmark federal funds rate by 50 basis points in September to a range of 4.75% to 5.0%.

What is certain is that Golub doesn't think US stocks will continue to rise for the rest of the year. Although he raised his 2024 forecast for the benchmark index from 5,600 points to 5,850 points, this actually means that the index will drop slightly from current levels.

According to UBS's outlook, US stocks are likely to consolidate by the end of 2024 before hitting new highs next year. The bank wrote, “Although Wall Street estimates (and our own models) try to reflect more normal levels of growth in the context of better discretionary consumer spending, the timing of this recovery is still very unclear.”