Why does UBS raise the S&P 500 to 5400?

the UPS It became the top “bull” for the index Standard & Poor's 500 In the US stock market, the target was raised to 5,400 units for the end of the year, which is also the highest forecast among investment banks.

The new forecast means an upside margin of about 8% for the index compared to its close of 5,005 points on Tuesday. The Swiss Investment Bank raised the index to 5,150 points in January, betting on deflationary inflation and interest rate cuts by the Federal Reserve.

However, earlier this month, consumer and producer prices raised fears of a renewed return to inflation after months of decline, a development that could delay interest rate cuts further.

UBS's view is that the rise Economic inflation In the US it tends to be a positive development for stock prices, as strengthening inflationary pressures mean more pricing power for companies and better profit margins.

UBS raised its earnings per share forecast for the S&P 500 this year to $240 from $235, an increase of 9.1% compared to the consensus forecast.

The index broke the 5,000-point mark after a strong rally led mainly by the “famous seven” mega-cap stocks and excitement about… artificial intelligence.

UBS revised its recommendation on the financial sector index to “overweight” from neutral as trade deals recover.

As for interest rate cuts based on pricing in the financial derivatives market, bettors are giving a 53% chance of the first 25 basis point cut by the Fed in June.

This market assessment coincides with the expectations of economists in a Reuters poll that they expect a reduction in the Federal Reserve’s intervention rate in June, and they believe that the danger lies in postponing the first cut until a later time rather than sooner.

Despite the stock market rising to a new record high in performance 10-year government bonds US interest rates rose by nearly 50 basis points to 4.28% after new macroeconomic data showed strong economic growth and continued inflationary pressures.

The world's largest economy grew at an annual rate of 3.3% in the last quarter, and the forecast for this year is 2.1%, higher than the 1.8% expected by the global economy. Nourish it It is considered an inflation-neutral growth rate.

Many analysts believe that the US Central Bank is determined not to repeat the mistake of 2021, when it believed that the rise in inflation would be temporary. Fed officials do not want to make a second mistake in the same cycle.

Eighty-six out of 104 economists surveyed in the latest survey expect the Fed to make the first move by lowering its key interest rate from the current range of 5.25% to 5.5% in the next quarter.

A narrow majority, 53 out of 104, see this happening at the Fed's policy meeting in June. The rest estimate that the first reduction will come sometime in the second half of 2024.

Fed through the mouth of the head Jerome Powell The ECB has made clear that it needs more certainty about the deflationary trend before making cuts in the cost of money.