With 80% of S&P 500 companies having reported earnings, numbers have been better-than-anticipated, UBS analysts noted.
Initially, the analysts had forecasted an earnings growth of 4–5% for the fourth quarter, excluding one-time charges related to banks replenishing the FDIC bailout fund. The growth rate is now expected to exceed 7%.
While some large-cap growth companies have posted exceptional earnings, the average S&P 500 company is also expected to see a growth rate of around 6%, UBS highlighted.
“In terms of breadth, 77% of companies are beating EPS estimates, and 65% are beating on revenues. Both are better than average,” analysts at UBS wrote.
Guidance the companies have been releasing this quarter has also shown promising signs.
The S&P 500's first-quarter forecast is adjusting downward as per typical seasonal trends, but the annual projection for 2024 for the median company remains stable. The aggregate earnings forecast for the next 12 months for the S&P 500 is on an upward trajectory, showing improvements across all sectors except for energy and materials.
The positive earnings season contributes to an optimistic market outlook, bolstered by solid economic growth, moderating inflation, anticipated Federal Reserve rate reductions, and significant demand for AI infrastructure.
This aligns with UBS’s more bullish projection, which sees the S&P 500 ending the year at 5,300.
“So, as the rally has continued, markets are pricing in plenty of good news,” Solita Marcelli, Chief Investment Officer Americas, UBS Global Wealth Management, said.
“The MSCI US is trading on 19.8 times 12-month forward earnings, a 20% premium to the 15-year average. The S&P 500 is now trading close to the 5,000 level where we would expect it to end the year in the event of a soft landing.”
So what does need to happen for the S&P 500 to reach UBS’ bull-case scenario?
“We would need to see further positive signs on inflation, Fed policy, and growth, including from data and earnings releases this week,” Marcelli added.
UBS’ bull-case scenario implies approximately 5.5% upside from the current levels.