UBS raises 2024 forecast for S&P 500 after ‘surge in AI investment’

“It’s been over a year since ChatGPT first burst on the scene, which has unleashed an AI arms race that shows no signs of letting up,” David Lefkowitz, head of U.S. equities at UBS Global Wealth Management, said in a note published after the market’s close on Thursday. “Our revised price targets suggest modest upside through the end of the year and we retain a neutral allocation to U.S. equities in our tactical asset allocation.”

UBS’s new year-end target of 5,200 for the S&P 500 is 200 points higher than its previous base case, according to a spokesperson for the bank. And its “upside scenario” for the U.S. equities index is now 5,500 for December, up from 5,300 previously, the spokesperson said in an email. 

“Despite recent mixed economic signals, we think the backdrop for U.S. equities remains supportive, driven by healthy economic growth, moderating inflation, a Fed that’s pivoting to rate cuts, and a surge in AI investment,” said Lefkowitz. “We expect three rate cuts in 2024 with the first one starting in June.”

The Federal Reserve’s benchmark interest rate is currently in the target range of 5.25% -5.5%.

Read: Goldman Sachs now sees first U.S. rate cut in June, just four in total for 2024

Under UBS’s “central scenario” for the S&P 500 this year, Lefkowitz expects “consumer spending should continue to be supported by healthy labor market dynamics.” The base case is linked to initial claims for unemployment insurance remaining low and jobs continuing to be added “in the most cyclical segments of the labor market,” he said, citing manufacturing and construction.

The S&P 500 has climbed 6.9% so far this year based trading levels around midday on Friday, after soaring 24.2% in 2023, according to FactSet data.

“Even though U.S. equities have performed very well in recent months, we think the key market drivers will remain supportive,” said Lefkowitz. “Not only were the fourth quarter results themselves better than we had expected, but the guidance was also solid,” he said of company earnings.

Under UBS’s “upside scenario,” AI is “a game-changer” in that its impact on productivity and earning growth is “larger and comes sooner than investor expectations,” according to the note. Also, inflation would be cooling faster than anticipated in UBS’s “upside” case for the S&P 500.

In the meantime, “some sentiment and positioning indicators” in the U.S. stock market appear “elevated,” prompting UBS to warn of “higher risk of a modest pullback in the coming months,”  said Lefkowitz. “That could offer investors a better opportunity to add to equity positions.”

The U.S. stock market was trading mostly higher around midday on Friday, with the S&P 500 up 0.2%, the Dow Jones Industrial Average
DJIA
rising 0.4% and the Nasdaq Composite
COMP
about flat, FactSet data show, at last check. All three benchmarks were on track for weekly gains.