To The Moon

UBS now expects the U.S. stock market to hit new highs in 2025. Jonathan Golub, the bank's strategist, raised his target for the $.SPX(.SPX)$ from 6,000 to 6,400 points in a note to clients on Tuesday. This new forecast implies a 9.2% gain from Monday's close.

Golub pointed to a favorable economic backdrop as the driving factor. "UBS economists forecast 3.7% growth in U.S. nominal GDP in 2025, roughly in line with long-term averages," he said. He added, "Rate cuts should reduce interest expenses and default risks, boosting earnings per share and valuations."

Golub’s call came right after the S&P 500 hit an all-time high, with the index up nearly 23% year-to-date. Investors are banking on the Federal Reserve cutting rates in the coming months, fueling the recent market surge.

"In non-recessionary environments, U.S. equity valuations typically rise when the Fed cuts rates," the strategist noted. "Despite high valuations, we expect price-to-earnings ratios to expand."

Golub also highlighted that a "significant drop in the federal funds rate could improve profit margins by 20 basis points by cutting interest expenses."

Rate Cuts on the Horizon

The CME Group’s FedWatch tool shows traders expecting a 25 basis point rate cut by the Fed in November, followed by another 25 basis points in December.

In September, the Fed already lowered its benchmark rate by 50 basis points to a range of 4.75% to 5.0%.

Not All Smooth Sailing Ahead

Golub isn’t calling for more gains for the rest of this year. While he bumped up his 2024 forecast for the S&P 500 from 5,600 to 5,850 points, that suggests the index may dip slightly from current levels.

UBS predicts that before setting new highs in 2025, U.S. stocks might consolidate by the end of 2024. The bank wrote,

"Although Wall Street estimates, and our own models, aim to reflect more normalized growth amid stronger discretionary consumer spending, the timing of this recovery remains uncertain."