Investing.com -- The rapid rise in interest rates over recent weeks has fueled volatility in US equities, but UBS strategists believe that the bull market “remains intact” thanks to solid earnings growth and a supportive Federal Reserve.
The investment bank projects S&P 500 earnings to grow 9% in 2025, reaching $270, and maintains a year-end price target of 6,600.
According to UBS, US economic conditions remain favorable for corporate profits. Following a slowdown in the summer, the labor market rebounded in the fourth quarter, with the three-month moving average of job gains reaching its highest level since May 2024.
Holiday sales have exceeded expectations, and the manufacturing sector is showing signs of recovery. The New Orders component of the ISM Manufacturing Index has expanded for two consecutive months, a first in two and a half years.
“As a result, the Atlanta Fed’s GDPNow model suggests solid economic growth of 2.7% in 4Q, which should drive healthy earnings growth,” strategists led by David Lefkowitz noted.
UBS expects fourth-quarter S&P 500 earnings to increase by 7–9% year-over-year, representing a 2–4% beat relative to consensus estimates. Mega-cap technology stocks are expected to account for more than two-thirds of this growth, driven by continued investment in AI infrastructure and adoption trends.
"Our confidence in earnings beats stems partly from the results of companies that have reported so far, with the median company beating EPS by 4.5%,” strategists continued. “Sixty-six percent of companies are beating sales estimates and 76% are beating EPS estimates.”
At the same time, they point out potential headwinds. A stronger US dollar could dampen first-quarter guidance for multinational companies, potentially reducing S&P 500 EPS growth by approximately 1.5%. Furthermore, lingering tariff concerns under the incoming Trump administration may introduce uncertainty in certain sectors.
High equity market valuations are also acknowledged as a potential challenge, with the S&P 500 forward P/E at 21.5x. However, UBS believes these valuations are justified by the current macroeconomic environment, including low inflation expectations and unemployment.
"Profit growth is more important for stocks over the next 12 months and should be a key tailwind for stocks in 2025," UBS’s team explained.
“Unless there is a major, unforeseen negative catalyst (such as a downgrade to earnings expectations), then valuations will not likely stand in the way of further gains,” it added.
Overall, UBS remains bullish on US equities, with a focus on large-cap stocks due to their exposure to AI and robust earnings trends.
The bank holds a ‘Most Attractive’ view on Information Technology, Communication Services, and Consumer Discretionary, and ‘Attractive’ views on Financials and Utilities. In terms of investment style, UBS has an ‘Attractive’ view on both growth and value stocks.