UBS raises its 2021 S&P 500 price target to 4,400 on strong earnings

Published Mon, May 17 20218:37 AM EDTUpdated Mon, May 17 202111:01 AM EDT

Strong earnings throughout the rest of the year should lift the S & P 500 more than UBS expected. The Wall Street firm raised on Monday its year-end price target for the S & P 500 to 4,400 from 4,250, implying a gain of more than 5% from its Friday closing level of 4,173.85. The benchmark is up about 11% year to date. "Significant upside to earnings should more than offset the challenges from valuation headwinds," UBS chief U.S. equity strategist Keith Parker told clients. For how to play it, UBS likes names with pricing power due to inflation risk and a handful of "new momentum" stocks, which have strong growth and fundamentals. UBS raised its forecast for 2021 S & P 500 earnings to $206 per share from $188 per share. The firm also hiked its 2022 estimate to $232 per share from $218 per share. "We believe the market continues to underestimate the strength of US earnings and another round of strong beats will fuel a series of upward earnings revisions, and a Q2 beat of 15%+," Parker said. With first-quarter earnings reporting season winding down, 86% of S & P 500 companies reported a positive earnings surprise, the highest since FactSet began tracking the data in 2008. UBS said the major averages may continue to consolidate in the next few weeks as investors evaluate the risks of inflation, the labor market and communication from the Federal Reserve. However, the bank sees room for market gains heading into second-quarter earnings season. "At this point the market will have to overcome the three peaks: peak earnings growth, peak economic growth and peak liquidity," Parker said. "We believe equities can still perform well in such an environment given the underlying supports." Parker noted that periods of decelerating but strong earnings growth — within a year of peaking — historically have meant annualized returns about about 10%. UBS also raised its S & P 500 target for 2022 to 4,650. UBS recommends names with pricing power due to inflation concerns, new momentum stocks — such as Disney , Alphabet , Darden Restaurants and Morgan Stanley —and companies that benefit from infrastructure and consumer spending. "Across factors, momentum tends to perform best at this stage of the cycle as what leads in the 'expansion' takes shape - in this case after unprecedented monetary+fiscal support amid a global pandemic," Parker said . "In our view, 'new momentum' has further room to run amid the next phase of the cycle, particularly given the extraordinary turnover of what is now high momentum." — with reporting from CNBC's Michael Bloom.

Traders on the NYSE, May 3, 2021.

Source: NYSE

Strong earnings throughout the rest of the year should lift the S&P 500 more than UBS expected.

The Wall Street firm raised on Monday its year-end price target for the S&P 500 to 4,400 from 4,250, implying a gain of more than 5% from its Friday closing level of 4,173.85. The benchmark is up about 11% year to date.

"Significant upside to earnings should more than offset the challenges from valuation headwinds," UBS chief U.S. equity strategist Keith Parker told clients.

For how to play it, UBS likes names with pricing power due to inflation risk and a handful of "new momentum" stocks, which have strong growth and fundamentals.