Wall Street’s bull market "intact" but pricing in "a lot of optimism" - UBS

Investing.com - A bull run in U.S. stocks is "intact" and could extend into next year, but equities may be pricing in "a lot of optimism," according to analysts at UBS.

In a note taking a "neutral" view of U.S. stocks, the analysts led by David Lefkowitz that while there view is not a "’negative’ stance," traders may be accounting for more clarity around global trade tensions.

Still, they flagged, there seems to be a lack of near-term catalysts for stocks, while valutions remain at frothy levels.

The analysts have backed their year-end target for the S&P 500 of 6,600 and estimated that the June level would stand at 6,800.

"Historically, the S&P 500 has performed well when the Fed is cutting rates during non-recessionary periods. We think this makes sense, as lower rates tend to stimulate the economy and bolster the outlook for earnings growth," the UBS analysts said.

"Our base case remains that the U.S. economy will remain resilient and that it is unlikely to spiral into a recession. [...] We therefore believe stocks are poised for further gains."

On Thursday, the benchmark index closed at 6,631.96, a fresh all-time high, as investors continued to digest a Federal Reserve interest rate reduction earlier this week. The blue-chip Dow Jones Industrial Average and tech-heavy Nasdaq Composite also posted record closes.

With the gains, the Dow and S&P 500 are both on track to finish the week 0.7% higher. The Nasdaq Composite has climbed 1.5%.

Wall Street has drawn support from the Fed’s decision on Wednesday to cut its benchmark rate by 25 basis points to a range of 4.00% to 4.25%.

The policy shift, aimed at cushioning a cooling labor market, was accompanied by projections for two more quarter-point reductions this year and another in 2026. Fed Chair Jerome Powell said the move was a “risk-management cut” and stressed that future easing would depend on incoming data. He pointed to persistent inflation pressures and uneven economic signals, underscoring that the central bank would proceed cautiously rather than committing to an aggressive cutting cycle.

Meanwhile, the UBS analysts gave an upbeat outlook for a boom in enthusiasm around artificial intelligence, particularly after mega-cap tech firms indicated during the second-quarter earnings season that heavy investment in the nascent technology will continue into 2026. The valuations of the so-called "Magnificent 7" group of AI-powered tech stocks subsequently rose back to the upper end of its three-year valuation range, they noted.

"So although this may mean there is less scope for above-average returns, we aren’t negative and reiterate that our constructive view on AI bolsters the outlook for U.S. equities," the analysts wrote.