Stocks are experiencing a notable upward trend, and in spite of numerous risks, analysts maintain a positive outlook for Wall Street. UBS has adjusted its year-end S&P 500 target to 7,900 from 7,500, attributing this revision to robust corporate earnings growth, accommodating monetary policy, and the anticipation that oil prices will not hinder the economy’s expansion.1 The benchmark index was on track Friday to achieve its eighth consecutive week of gains, trading near 7,500 and positioned to close just below last week’s record high. The recent rally “has validated our approach of remaining focused on fundamentals rather than being swayed by headlines,” noted Mark Haefele. According to Haefele, the fundamentals indicate that stocks are likely to experience ongoing gains. Historically robust earnings growth stands as a fundamental pillar that Haefele anticipates will underpin markets this year. With approximately 95% of the S&P 500 having disclosed first-quarter results, earnings are poised to increase at their most rapid rate in four years, and firms have surpassed expectations on both revenue and profit margins at an exceptional frequency. Consequently, analysts on Wall Street have elevated their forecasts for profit growth at one of the most rapid paces observed in decades, as noted by Haefele.

Granted, a significant portion of that growth has been concentrated in the technology sector, particularly among the firms most affected by the AI data center surge. A memory shortage driven by surging demand from AI data centers has caused sales and profits to soar at companies such as Micron and Sandisk. Tech giants reported that their cloud computing businesses accelerated in the first quarter, contributing to increased demand for chips from companies such as Nvidia, Broadcom, and Advanced Micro Devices. According to Haefele, merely four semiconductor firms along with the energy sector contribute to over fifty percent of the rise in earnings estimates observed in the last quarter. Nonetheless, apart from the flourishing semiconductor sector, earnings continue to expand at a robust pace. The median earnings beat for the S&P 500 in the first quarter was nearly 6%, surpassing the long-term average. The median company’s growth expectations have risen approximately 3.5%, a noteworthy development given that estimates typically tend to decrease as reports are released. “Provided the U.S. consumer and labour market hold up, continued economic growth and AI adoption should drive further U.S. earnings increases,” wrote Haefele.

However, it is not assured that the consumer and labour market will remain resilient. U.S. petrol prices have increased by 50% since the conclusion of February, reaching their peak level since 2022. Inflation accelerated to its highest rate since 2023 last month, while consumer confidence has deteriorated significantly due to escalating prices. U.S. consumers have benefited from substantial tax returns and collaborative initiatives by governments worldwide aimed at stabilising oil prices. Those efforts, including releases from strategic reserves and energy-saving measures, have contributed to the stabilisation of oil prices over the past two months, even as the flow of oil from the Persian Gulf remains minimal. “We are conscious that buffers are finite, and if disruption to energy supply continues for a prolonged period, oil prices are likely to rise” and put pressure on consumers, wrote Haefele, who advocates increasing commodities exposure as a hedge against geopolitical risk. Elevated oil prices pose a risk to stock market gains through an alternative channel: monetary policy. With inflation on the rise, investors are now anticipating that the Federal Reserve’s forthcoming interest rate adjustment will be an increase, contrasting with the cuts that were broadly anticipated at the start of the year.

UBS exhibits a level of optimism that significantly surpasses that of the average trader. Rates are currently characterised as “modestly restrictive and wage growth is falling,” as noted by Haefele. He also points out that incoming Fed chair Kevin Warsh is “inclined to look through higher inflation caused by one-off factors” such as the closure of the Strait of Hormuz. UBS anticipates a reduction in rates by 25 basis points from the Fed in December, followed by another cut in March, despite current market probabilities indicating a 0% likelihood of such actions.2 In the scenario where Treasury yields increase, UBS anticipates that robust corporate earnings and expenditure will mitigate the challenges posed by rising interest rates. While the firm promotes the diversification of portfolios to mitigate the concentration of large-cap technology stocks, it also advises increasing exposure to international equities, particularly in Japan, Switzerland, and emerging markets.