UBS on the S&P 500: Further upside ahead after breaching 4,000

imageStock Markets13 hours ago (Apr 07, 2021 11:58)

© Reuters.

By Samuel Indyk – In a recent update, UBS Chief Investment Officer Mark Haefele said there is further upside ahead for the S&P 500 after the index broke above 4,000 for the first time last week.

In Q1, the S&P 500 gained 5.8%, marking the best 12-month rolling return for the index since 1936, which is up 82% from its low hit during the onset in the pandemic in March last year.

All-time highs are no barrier to further gains

Haefele argues that despite the index hitting an all-time high recently, there is still room for upside.

“Based on data going back to 1960, stocks have performed slightly better than average after hitting all-time highs,” Haefele said. “Our analysis shows that after reaching a fresh high, stocks rose another 11.7% in the following 12 months, compared with 11.3% from levels below record highs.”

Rising nominal yields and equity rallies tend to go hand in hand

There have been fears that rising bond yields could end the rally in stocks, particularly in the tech sector, which has benefitted from easy monetary policy in recent years.

“In the past 25 years, there have been 10 periods in which the United States 10-Year bond yield has risen by more than 100bps,” said Haefele. “And in all instances, global equities delivered flat or positive returns.”

Current US economic and policy conditions provide further support

The outlook for the economy is improving daily, evidenced by the IMF’s latest update which saw them upgrade their 2021 US growth forecast to 6.4% from the 5.1% growth it was projecting two months ago. The labour market is also recovering at breakneck speed, supported by the vaccination programme which is leading to a rebound in services.

“Against this backdrop, we recommend continuing to position for reflation as the economic recovery gathers pace,” said Haefele.

“We believe the rotation out of growth stocks and into cyclical areas of the market has further to run, and we recommend investors tilt their stock exposure to sectors that are likely to benefit from faster economic growth and a steeper yield curve, including financials, industrials, and energy stocks.”

UBS on the S&P 500: Further upside ahead after breaching 4,000

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