Investing.com -- UBS analysts see room for further gains in equity markets, buoyed by solid fundamentals and supportive macroeconomic data.
Despite recent declines— the Nasdaq fell 0.6% and the S&P 500 by 0.3% this week—UBS points to a robust U.S. economy and the potential for Federal Reserve rate cuts as grounds for optimism.
"Solid fundamentals point to further potential equity gains," said the bank.
U.S. third-quarter GDP data revealed annualized growth at 2.8%, driven largely by consumer spending, which rose at a 3.7% rate, UBS noted.
Goods spending increased by 6%, surpassing services growth of 2.6%. The recent ADP employment report also showed private job creation far outpacing expectations, with 233,000 jobs added in October compared to the expected 111,000.
This aligns with an annual GDP growth average of 2.5% over the past five years, based on recent BEA revisions, UBS analysts explained. These figures indicate the U.S. economy is on a sustainable growth path, limiting recession risks in the near term.
With inflation appearing to cool, UBS believes the Fed will likely continue easing rates. They note that Q3 data showed a decline in the personal consumption expenditures (PCE) inflation rate to 1.5% from 2.5% in Q2, while core PCE was at 2.2%.
“We expect 50 basis points of rate cuts for the rest of this year and a further 100 basis points of easing in 2025,” UBS stated, adding that past Fed rate cuts during periods of non-recession have historically benefited equities.
UBS also sees structural support from the AI sector, explaining that. earnings beats from tech giants Microsoft (NASDAQ:MSFT), Meta (NASDAQ:META), and Alphabet (NASDAQ:GOOGL) underscored strong cloud and AI growth, despite margin pressures from rising capex.
UBS favors AI-linked semiconductor stocks and U.S. megacaps for their growth potential. With rate cuts on the horizon and AI as a growth driver, UBS remains bullish on U.S. equities, setting an S&P 500 target of 6,600 by the end of 2025.