UBS remains bullish on S&P 500, optimistic about profit prospects and expects AI capital expenditure to surge 68% this year
Although, in British terms, the stock market has been dragging its feet recently, Still maintaining a bullish view on the S&P 500 Index. This time it is not an adjustment to the target price, but the bank’s latest statement has made the market debate about the necessary conditions for the subsequent rise of U.S. stocks clearer. The previous rise in stock prices was mainly due to market optimism, valuation expansion and market confidence in the concept of artificial intelligence, but in the next stage the market will no longer have such a high margin for error. Investors have now entered a "seeing is believing" wait-and-see mode. Market expectations have been fully met before. Once a company's profits fall short of expectations, its performance guidance is lowered, or there are signs of weak growth in corporate spending, it will be difficult for the market to tolerate it. UBS still maintains an optimistic attitude, but whether this forecast can be realized depends largely on whether the company can deliver solid performance, rather than just relying on investors to give a higher premium for future growth. UBS’s target price of 7,900 points is not a new reduction or increase. UBS Global Wealth Management's year-end target price of 7,900 for the S&P 500 remains unchanged. However, it should be noted that the July 15 conference call did not raise the target point. UBS had previously raised its index target from 7,500 points to 7,900 points on May 22. The core content added this time is this It elaborates on the core driving force that drives the market to start the next round of upward trend. The bank believes that what can support the U.S. stock market’s strong finish at the end of this year will be strong cash flow, profit growth and the company’s own operational capabilities, rather than the general popularity of artificial intelligence. Since the beginning of this year, the index's target point has undergone multiple revisions. The forecast point given by UBS in early April was 7,700 points. Later, as rising oil prices threatened economic growth and pushed up inflation, the Federal Reserve's expected interest rate cut was postponed, and the bank lowered its target to 7,500 points on April 7. The increase in May was a direct increase of 400 points from the previous target point, and also made the latest target 200 points higher than the baseline forecast before the outbreak of the geopolitical conflict. This is an optimistic but cautious forecast, not an extremely aggressive bullish judgment. Since raising its target price in May, most of the gains UBS had predicted have been realized. The core logic supporting UBS’s bullish expectations UBS's bullish forecast for the S&P 500 Index mainly relies on a substantial increase in the index's overall profit expectations. The bank raised its 2026 earnings per share forecast for the index from $310 to $335, corresponding to an increase in annual earnings growth to nearly 20% from the previous forecast of 11%. UBS also gave a forecast of earnings per share of US$375 in 2027, corresponding to a continued increase in earnings of 12%. If the index hits 7,900 points at the end of the year, the S&P 500 index will have a price-to-earnings ratio of about 23.6 times the expected performance in 2026, and a price-to-earnings ratio corresponding to the expected performance in 2027 of about 21.1 times. According to market data agency FactSet, this valuation level is 25% higher than the S&P 500 index's ten-year average forward price-to-earnings ratio of 18.9%. This also means that the company's actual operational cash-out ability has become key, and the current valuation has fully factored in the company's need to deliver profit growth that far exceeds conventional levels. Of the $25 earnings per share increase raised by UBS this time, the semiconductor sector contributed nearly half, totaling about $11; the energy sector contributed about $6, and all other industries contributed a total of about $8. In addition, UBS predicts that global artificial intelligence-related capital expenditures will surge by 68% in 2026, totaling approximately US$820 billion; in 2027, this expenditure will continue to grow by 21%, with a scale of nearly US$1 trillion. The current supply of semiconductors is tight, chip rental prices are rising, and companies continue to raise funds, making it almost impossible for the industry to reduce capital expenditures in the short term. Risk factors that could undercut UBS's bullish view The first major risk: Market profit expectations set the threshold too high. UBS itself does not believe that companies will raise their performance guidance on a large scale again this quarter. The unanimous expectations of the entire Wall Street market require extraordinary and outstanding performance from the technology and semiconductor sectors to be achieved. Strategist Ben Snyder believes that even if long-term corporate profits are still the core factor driving stock prices, U.S. stocks may still face downward pressure in the short term due to expectations of interest rate hikes.
According to reports, although the inflation data has cooled down this week, market risks have not been completely eliminated. The CME Group's Federal Reserve Interest Rate Watch Tool shows that the market still predicts that the probability of the Federal Reserve raising interest rates at the September 15-16 interest rate meeting is about 60%. The second major risk: market sector concentration is too high. The main increase in UBS's profit forecast increase comes from the chip sector and energy sector. Once the price trend of memory chips reverses, large cloud service providers reduce expenditures, and the profits of energy companies decline, the profitability fundamentals on which the 7,900-point target relies will be weakened. Third, international oil prices and geopolitical issues remain core risks. UBS previously lowered its index target precisely because the risk of shipping obstruction in the Strait of Hormuz may push inflation, dragging down economic growth, and delaying the implementation of the Fed's interest rate cut cycle.
According to reports, although the inflation data has cooled down this week, market risks have not been completely eliminated. The CME Group's Federal Reserve Interest Rate Watch Tool shows that the market still predicts that the probability of the Federal Reserve raising interest rates at the September 15-16 interest rate meeting is about 60%. The second major risk: market sector concentration is too high. The main increase in UBS's profit forecast increase comes from the chip sector and energy sector. Once the price trend of memory chips reverses, large cloud service providers reduce expenditures, and the profits of energy companies decline, the profitability fundamentals on which the 7,900-point target relies will be weakened. Third, international oil prices and geopolitical issues remain core risks. UBS previously lowered its index target precisely because the risk of shipping obstruction in the Strait of Hormuz may push inflation, dragging down economic growth, and delaying the implementation of the Fed's interest rate cut cycle.