UBS analysts believe the stock is poised for growth, citing three main reasons: a favorable macroeconomic environment, strong earnings growth and rising costs of AI investments.
First, UBS highlights the favorable macroeconomic environment, noting that “data over the past few weeks shows the economy is cooling, raising the possibility of a Fed turnaround before the end of the year.”
Real GDP for the first quarter of 2024 was revised down to 1.3%, indicating a slowing economy that could lead to rate cuts. Additionally, UBS adds that weaker-than-expected retail sales and lower-than-expected inflation suggest a “healthy slowdown” that could lead to “further disinflation,” allowing the Fed to potentially cut rates by 50 basis points by the end of the year.
Second, earnings growth remains strong. UBS said first-quarter earnings were better-than-expected, with a positive revision to forecasts, and earnings extended beyond leading technology companies.
“Trends in artificial intelligence (AI) have been particularly robust,” boosting sectors such as semiconductors, utilities, industrials and materials. Despite some misses, such as Salesforce (NYSE:) and Dell (NYSE:), UBS views them as isolated events, remaining optimistic and raising EPS estimates for 2024 and 2025.
Finally, they note that AI spending continues to generate benefits. UBS notes strong earnings from Nvidia (NASDAQ:), especially its data center business, which grew more than 400% in the first quarter of 2024. UBS believes that investments in AI will generate significant returns in the downstream business, supporting future growth across the AI value chain.
As such, UBS said favorable macroeconomic conditions, strong earnings growth and advances in artificial intelligence are driving shares higher, raising its year-end S&P 500 target to 5,500.