UBS Remains Bullish on U.S. Equities: 9% Earnings Growth Expected by 2025 Amid Strong Economic Indicators

Recent fluctuations in interest rates have indeed stirred the pot in U.S. equities, but UBS strategists are confident that the prevailing bull market is far from over. They attribute this resilient outlook to robust earnings growth and ongoing support from the Federal Reserve. Notably, UBS forecasts a 9% increase in S&P 500 earnings by 2025, aiming for a target price of 6,600 by year-end.

The bank highlighted that current U.S. economic indicators provide a favorable backdrop for corporate profitability. After a summer slowdown, the labor market roared back to life in Q4, with the three-month moving average of job growth hitting its peak since May 2024. This resurgence, combined with unexpectedly strong holiday sales and a recovering manufacturing sector, paints a positive picture. For instance, the New Orders component of the ISM Manufacturing Index has demonstrated consecutive expansion for the first time in two and a half years.

UBS’s analysis leverages the Atlanta Fed’s GDPNow model, which posits a 2.7% economic growth rate for the fourth quarter, fueling expectations for healthy earnings increases. The strategists predict a year-over-year growth rate for S&P 500 earnings in Q4 to hit between 7% and 9%, surpassing consensus estimates by approximately 2% to 4%. A significant contributor to this expansion is anticipated to come from mega-cap technology companies, which are expected to capture more than two-thirds of the earnings growth driven by booming investments in AI infrastructure and evolving adoption trends.

“Our optimism regarding potential earnings surprises is bolstered by the performance of companies that have already reported, with the median company outperforming EPS expectations by 4.5%,” the strategists explained. They also noted that 66% of firms are exceeding sales forecasts while an impressive 76% are outpacing EPS estimates.

Nevertheless, it's important to acknowledge some looming challenges. A strengthening U.S. dollar might pose a risk to first-quarter forecasts for multinational corporations, potentially curtailing S&P 500 EPS growth by about 1.5%. Furthermore, uncertainties stemming from the impending Trump administration and its tariff policies could impact specific sectors. The high valuations in the equity market are also a consideration, with the S&P 500’s price-to-earnings ratio lingering at 21.5x. Despite these factors, UBS asserts that the current macroeconomic landscape—characterized by low inflation expectations and low unemployment rates—justifies these valuations.

“Profit growth is poised to be the primary driver for stocks over the coming year and should serve as a strong tailwind for the market in 2025,” emphasized UBS’s strategists. They believe that barring any unexpected adverse developments—like significant downgrades in earnings forecasts—the current valuations should not hinder further market advancement.

Overall, UBS maintains a bullish stance on U.S. equities, particularly favoring large-cap stocks due to their robust earnings outlook and connection to AI. They view sectors such as Information Technology, Communication Services, and Consumer Discretionary as 'Most Attractive,' while deeming Financials and Utilities as 'Attractive'. In terms of investment styles, both growth and value stocks are viewed favorably.