Can US stocks still rise by 9%? UBS: bullish outlook, S & P 500 will rise to 3700

According to mark haefele, UBS’s chief investment officer, if the stock market risk premium falls back to the average level of the previous five years and Treasury yields only moderately rebound, the S & P 500 is likely to rise 9% between now and June next year.

The US Federal Reserve’s unprecedented monetary easing policy has caused the stock market and the Treasury bond market to completely separate. But according to mark haefele, chief investment officer of UBS, this may be just what American stock investors want.

In a research report released on Thursday, mark haefele explained that under normal circumstances, treasury bond yields rise and fall simultaneously with stock prices. However, the Federal Reserve has made it clear that in the foreseeable future, interest rates will remain at about zero level for a long time. Therefore, when the stock market soars, Treasury bond yields become more and more depressed.

In this case, “investors are now faced with a simple choice” – whether to stay away from the stock market cautiously or to enter the stock market with confidence in the influence of the Federal Reserve?

He concluded that if the stock market risk premium fell back to the previous five-year average and Treasury yields only moderately rebounded, the S & P 500 is likely to rise another 9% between now and June next year.

As we all know, in the second and third quarter of this year, the US stock market was strong. In a normal cycle, when investors withdraw capital from safe haven assets such as treasury bonds and put them into stocks and other risk assets, the price of treasury bonds will fall, making the yield of treasury bonds and stock prices rise simultaneously. However, this scene has not happened in the past. While the economic data is gradually improving and the stock market is hitting new highs, the Treasury bond yield has never been able to get out of the historic low.

The landmark turnaround took place in June, when at the FOMC meeting that month, Federal Reserve Chairman Powell made it clear that they “did not even think of raising interest rates.”. Mark haefele’s assessment is that perhaps it was this announcement that actually changed investors’ expectations. Since then, treasury bond yields and stock prices announced decoupling, began to decline. Although there was a slight rebound in the yield in August, it is the general trend to continue to decline throughout the summer.

This market phenomenon is likely to continue for several years. Fed officials have said more than once that they expect interest rates close to zero to remain at least until 2022. This means that “there is still a long way to go” for the policy to really turn to the hawkish position. Therefore, market participants should be well prepared to take advantage of this new paradigm.

“Investors now face a simple choice.” They can be cautious, believing that the bond market is about to consolidate, or they can believe that the stock market is “more affected by the Fed’s policies” and continue to invest in stocks.

“If you, like us, believe that the latter description is closer to the current reality, of course, your focus should be shifted to the words and deeds of the Federal Reserve, and the same is true of asset prices.”

UBS’s current target for the S & P 500 is 3500, which means that the S & P 500 will rise about 3% from Friday’s close to the end of June next year. Needless to say, this means a new high, but heffer also believes that under his best expectations, as long as certain conditions are met, there will be more room for US stocks to rise.

First, the index’s stock risk premium needs to shrink to an average of 3.8% in the five years before the outbreak. Then, assume that the 10-year bond yield will rise to 0.85%, while the S & P 500 index will continue to maintain its current forward P / E ratio of around 22. In this case, the risk premium is enough to bring the index to 3700, or 9% higher, in June next year.

At least from the current situation, the possibility of this optimistic expectation of UBS becoming a reality is becoming increasingly large. Economic data released at the end of the summer show that consumer confidence and spending are on the right track to recovery, despite the threat of a resurgence of the epidemic. At the same time, Congress has made little progress in passing the second stimulus bill.

Of course, there is the Fed, which still estimates that its near zero interest rate and other easing policies will continue. Federal Reserve officials “agreed that the current public health crisis will have a significant impact on economic activity, employment and inflation in the near future and considerable risks to the economic outlook in the medium term,” the minutes of the public meeting said on Wednesday.

What’s more, the Fed is reluctant to set a clear timetable for gradual easing of monetary easing. It is almost certain that, for at least the next few months, monetary policy makers “will not even think about raising interest rates.”.

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