UBS Predicts S&P 500 Earnings Growth to Rise 11% This Year Fueled by AI Investment
UBS, a major investment bank, forecasts that earnings for companies in the S&P 500 will increase by 11% this year. This growth is largely driven by strong economic performance and increased spending on artificial intelligence (AI) infrastructure.
Key Reasons for the Rise
According to UBS strategists:
- Profit Growth: They observe solid and broadening profit growth among companies.
- Disinflation: Prices are rising more slowly than before, which is good for the economy.
- Federal Reserve's Actions: They expect the Federal Reserve (Fed) to cut interest rates. Lower rates make borrowing cheaper, stimulating economic activity.
Economy and Job Market Strength
Despite some indicators of slowing growth, UBS believes the economy remains stable. Here’s why:
- Strong Labor Market: Fewer people are losing jobs. For every unemployed person, there are about 1.2 job openings.
- Consumer Spending: People continue to spend money because real wages (wages adjusted for inflation) are rising.
Inflation Trends and Fed Policy
- Inflation: First-quarter inflation was high, but it softened in the second quarter. UBS expects this trend to continue, making goods and services less expensive over time.
- Fed Rate Cuts: With inflation easing, the Fed might cut interest rates. UBS predicts two rate cuts in 2024, starting in September. Lower rates often help stock prices by making loans for businesses and consumers cheaper.
Q1 Earnings and AI Impact
The first quarter earnings exceeded expectations. UBS was particularly impressed by:
- Guidance: Companies are optimistic about future growth.
- Earnings Per Share (EPS): Growth is expanding beyond just the biggest companies (Magnificent 7).
AI investments are playing a significant role. Companies are spending more on developing AI tools to improve business processes.
Future Earnings Projections
UBS now expects:
- S&P 500 earnings per share (EPS) to grow by 11% in 2024, reaching $250
- In 2025, they foresee a 6% increase, bringing EPS to $265.
Overall, the environment is favorable for U.S. stocks. They recommend allocating funds fully into this asset class, targeting 5,500 points for the S&P 500 by end-2024 and 5,600 by June 2025.
Explanation of Key Terminology
- Earnings: The profit a company makes. For example, if you sell cookies and make more money than you spend on ingredients, the extra money is your earnings.
- Artificial Intelligence (AI): Technology that mimics human intelligence. For example, virtual assistants like Apple's Siri or Google's Alexa use AI.
- Federal Reserve (Fed): The central banking system of the U.S. It controls the supply of money and interest rates.
- Interest Rates: The cost of borrowing money. Lower rates mean cheaper loans, encouraging spending.
- Earnings Per Share (EPS): A company's profit divided by its number of shares. For example, if a firm makes $100 and has 10 shares, the EPS is $10.
By following these points, you can see why UBS is optimistic about the market’s future and the role AI is playing in driving growth.
