The S&P 500 reached new highs on Monday, extending a rally that has exceeded 13% since the end of March. UBS has held to an "Attractive" rating on U.S. equities and reiterated a year-end S&P 500 target of 7,500, identifying three central factors that could sustain further upside: stronger-than-expected corporate earnings, what it views as a supportive trajectory for monetary policy, and persistent spending on artificial intelligence.
UBS strategists, led by Mark Haefele, noted that reporting season so far has shown encouraging results. Companies representing just over a quarter of the index's market capitalization have reported, and nearly 80% of those firms have beaten both sales and earnings-per-share estimates. UBS also observed that the size of those beats has been growing.
"While travel-related industries reported some pressure due to the Iran war, guidance overall is coming in better than feared. There are also signs of cyclical improvement, including a pickup in non-residential construction in areas such as manufacturing, power, data centers, and infrastructure," the strategists said. UBS reiterated its forecast for 17% EPS growth for the quarter.
On the policy front, UBS flagged the ongoing leadership transition at the Federal Reserve as a focal point for markets. Kevin Warsh, President Trump's nominee to succeed Jerome Powell, is described as appearing on track for Senate confirmation. UBS expects the Fed to begin easing later in the year, projecting 50 basis points of rate cuts. The bank warned that higher energy costs are likely to push headline inflation nearer to 3.8% in the near term, but it still models inflation moderating to 3.3% by year-end.
UBS's strategists argued that several dynamics support their view for 50 basis points of easing: "Limited pass-through to core readings, vulnerability in the jobs market, as well as slowing growth in the second half of the year should all support 50 basis points of rate cuts," they said.
The third pillar of UBS's constructive outlook is investment related to artificial intelligence. The strategists noted that "recent data points and management commentary continue to show that AI demand remains strong," with companies across semiconductors, power generation, and electrical systems delivering solid results and in some cases lifting guidance.
Evidence of stronger demand in chip markets was visible in recent corporate reports. Texas Instruments' latest results were cited as pointing to a stronger cycle for analog semiconductors. Supply constraints, UBS noted, have helped sustain the rally in chip stocks; the Philadelphia semiconductor index has rallied more than 45% over the past four weeks.
Still, the outlook is not without potential headwinds. Brent crude trading above $109 a barrel increases sensitivity to fresh headlines from the Middle East. In the near term, markets will also be watching policy decisions from the Federal Reserve, the European Central Bank, and the Bank of England, as well as upcoming earnings from megacap technology companies, any of which could alter market momentum.
Bottom line - UBS maintains a bullish posture toward U.S. equities based on stronger-than-feared corporate results to date, an expected pivot in monetary policy later in the year, and continued AI-driven spending across technology and infrastructure-related sectors. Observers should monitor energy price moves and a busy central bank and earnings calendar for risks to that view.