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  • Why UBS Sees the S&P 500 Heading to 6,600 by End of 2025

Why UBS Sees the S&P 500 Heading to 6,600 by End of 2025

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Bloomberg Nov 22, 2024 10:01 · 8516 Views

David Lefkowitz, UBS Global Wealth Management's head of equities Americas, sees durable economic growth, Federal Reserve rate cuts and AI opportunities keeping the market rally alive in 2025.

Disclaimer: This content is for informational and educational purposes only and does not constitute a recommendation or endorsement of any specific investment or investment strategy. Read more

Transcript

  • 00:00 So the roaring 20s is the idea is that you have lower rates, you get lots of growth, everything's going to be awesome.
  • 00:05 And you guys think that's going to continue.
  • 00:09 Yeah, we, we do.
  • 00:10 I,
  • 00:10 I would, if I had to take a step back, Alex, the way, the way I would phrase it is I think
  • 00:14 the drivers of the rally that we've seen over the last two years, we think those are still applicable to next year,
  • 00:21 namely those have been, we've had
  • 00:23 durable economic growth think that continues into 2025.
  • 00:28 At the same time, we've seen disinflation which has led to now Fed rate cuts.
  • 00:33 We think there's more to go in that.
  • 00:35 And, and by the way, when you have that combination of durable growth and Fed rate cuts,
  • 00:40 you tend to see stocks do quite well
  • 00:43 and, and usually they rise for the S&P 500
  • 00:46 close to 20%
  • 00:48 in the year after the first Fed rate cut.
  • 00:50 So that that's what we're, that's the window we're in right now.
  • 00:54 And, and then the third leg of the stool is, is AI.
  • 00:57 And we think, you know, clearly there's much, much more
  • 01:00 priced for AI
  • 01:02 opportunities now, but we still think there's more to go.
  • 01:04 So we think the main drivers of the rally are, are largely still in place.
  • 01:09 So if that's the case, then
  • 01:12 what is your conviction level to the 6600?
  • 01:14 Because I feel like everyone now has 6500 and 6600.
  • 01:17 So now it feels like it's consensus and that's going to make me worried.
  • 01:22 Yeah, I, I think, I mean, my personal conviction, I, I think we feel pretty good about it.
  • 01:26 And, and we just don't look at this from a
  • 01:29 top down perspective.
  • 01:30 We also look at this from
  • 01:32 from a bottom up perspective as well
  • 01:35 and just thinking about some of the secular drivers that we were talking about, you know biggest of which is is probably
  • 01:41 AI,
  • 01:42 but some of the companies that are leveraged to those trends, we think those companies look interesting as well.
  • 01:48 I think you can also expand the lens a little bit and look at
  • 01:52 some of the companies that are levered to
  • 01:54 the
  • 01:55 electrification that we see going on.
  • 01:57 You know, some of that's driven by AI data centers,
  • 02:00 but also we have an aging grid where there's decarbonization effort.
  • 02:04 So
  • 02:05 I think there's a number of ways to look at this,
  • 02:08 you know, agree.
  • 02:08 I think, I think most of,
  • 02:11 you know, most people are fairly constructive.
  • 02:12 That doesn't mean it's the wrong call,
  • 02:15 you know, because if the drivers do turn out the way we think they will, we think stocks will be higher.
  • 02:19 That's not to me not not to suggest that there won't be some volatility along the way.
  • 02:23 We know there always is,
  • 02:25 we've got tariffs to contend with
  • 02:27 going to be contentious budget negotiations.
  • 02:29 So
  • 02:30 there's plenty of things to think about.
  • 02:31 Well, let's, well, let's think about those things a little bit more in depth, David, because I am curious, because all of the things we had on the screen, all of the things we're talking about
  • 02:38 are unique in one particular element, and that's
  • 02:41 government involvement to some degree or another.
  • 02:43 A lot of those things aren't going to happen without government help or at least with the government not getting in the way with regards to
  • 02:49 any sort of onerous regulations.
  • 02:50 How much confidence
  • 02:52 do you have heading into a new administration, heading into a new Congress in January
  • 02:56 that they're not going to be an impediment to that growth that you're talking about?
  • 03:01 Yeah.
  • 03:01 I mean, I, I think this,
  • 03:03 I think this new administration is, is largely focused on trying to
  • 03:07 get government less involved in the economy.
  • 03:09 And yeah, there could be
  • 03:11 less support for things like renewables and, and things like that.
  • 03:14 But,
  • 03:15 you know, I would also bear in mind that
  • 03:17 a lot of companies have decarbonization goals.
  • 03:20 A lot of state governments and local governments are, are in the same boat.
  • 03:25 So to the extent that,
  • 03:27 you know, usually government getting a little bit less involved tends to,
  • 03:31 to stimulate growth a little bit.
  • 03:33 You know, I think there's still some uncertainty that that companies, consumers and businesses have to contend with.
  • 03:38 And that has to do with
  • 03:39 tax policy, spending policy
  • 03:41 and, and things like that.
  • 03:42 But,
  • 03:43 you know, in general, I, I don't think the government involvement is going to be
  • 03:47 much of an impediment.
  • 03:48 So
  • 03:49 when you look at the potential risk out there, at least the risk that need to be factored in, I mean what are a couple that are kind of rise to the top of your list to keep an eye on?
  • 03:58 I think I think probably the biggest risk is if we see inflation really moving the wrong way.
  • 04:05 You know, this rally that we've seen over the last two plus years has really been predicated on
  • 04:10 the substantial improvements in inflation
  • 04:13 and there still is a little bit more to go.
  • 04:16 And that has those improvements have prompted the Fed to start cutting rates.
  • 04:20 If we start to see inflation moving the wrong way, IE moving up,
  • 04:25 and that could happen because of,
  • 04:27 you know, mismanagement on tariffs, it could happen.
  • 04:29 The economy just runs a little bit too hot.
  • 04:32 You know, there are risks there.
  • 04:33 That's not our base case.
  • 04:34 I think that's that's certainly one thing to worry about.
  • 04:38 And then look, I mean a lot of this market has been driven by AI
  • 04:42 and to the extent we see any disappointment there, we don't think we will.
  • 04:46 We think we're going to see another year of healthy growth in 25.
  • 04:49 But clearly that would be something that that would be
  • 04:51 troubles
  • 04:52 troubling as well.
  • 04:53 So, David, it was interesting.
  • 04:54 BlackRock Black,
  • 04:56 excuse me, Bridgewater knew it would be there
  • 04:58 was talking about just that point.
  • 05:00 In terms of higher inflation and that potentially you could wind up seeing a Trump pick for Fed chair that's OK with higher inflation and also will cut rates.
  • 05:08 Does that set us up for a dangerous environment going forward or do you think that that will be able to then extend the warring 20s?
  • 05:16 I, I think it's all about a matter of degrees.
  • 05:19 I, I mean, I think if we're talking about inflation running
  • 05:22 2 1/2 to three, look, I, I mean, long term inflation in the United States, you know, has been closer to three than it has been to two.
  • 05:29 So if we're talking about something like that,
  • 05:32 I think that's fine.
  • 05:34 If, if we're talking about
  • 05:36 something higher than that in the context of still Fed rate cuts, I I think you would start to see the bond market
  • 05:42 sending signals that they weren't necessarily
  • 05:45 as comfortable with that.
  • 05:46 You know, you would, you know, the Fed doesn't have as much control over the long end of the curve.
  • 05:50 You know, you could see long term interest rates rise as long term inflation expectations rise.
  • 05:55 So some of those policies might end up being counterproductive if they let inflation run
  • 06:00 too hot a
  • 06:01 little bit above the formal Fed target.
  • 06:03 I think that's that's
  • 06:05 very manageable,
  • 06:07 but a lot above that's a different story.
  • 06:09 I think
  • 06:09 you guys are looking at investment grade bonds also diversified fixed income strategies and equity income strategies.
  • 06:16 So it's all about getting that income.
  • 06:17 Where on the curve or where in corporate credit would you like?
  • 06:22 Yeah, so you know, we do like investment grade we've gone
  • 06:25 you know, we're not we're not really
  • 06:26 willing to extend out much on duration right now.
  • 06:30 We do think rates
  • 06:31 eventually come down towards the,
  • 06:34 you know, at some point over the course of 2025,
  • 06:37 but we want to get more confidence in terms of
  • 06:40 the Fed rate cuts,
  • 06:41 in terms of the
  • 06:43 the outlook for tariffs and, and things like that.
  • 06:45 So,
  • 06:46 you know, don't want to extend duration too much, but at some point,
  • 06:50 you know, could be more interesting to do that.