UBS tells investors to buy falling US stocks on strong earnings, predicts S&P 500 to rise 8% this year

Investment bank UBS recommended investors “buy the dip” in U.S. stocks, saying the fourth-quarter earnings season strengthened the case for holding stocks.

The SP 500 will rally to 4,850 by the end of the year, UBS predicted, which would represent an increase of 8% from Monday’s closing level of 4,483.87.

“Stronger earnings are why we recommend buying the dip,” UBS analysts, including head of U.S. equity strategy Keith Parker, said in a Monday note.

Analysts said S&P 500 companies beat earnings expectations by 10% overall and sales expectations by just under 3%.

The companies are on track to post profit growth of more than 25% for the fourth consecutive quarter, according to data provider FactSet.

Stocks have had a wild ride in 2022 as investors brace for the Federal Reserve to raise interest rates in a bid to rein in the highest inflation in 39 years.

The S&P 500 was down 5.9% for the year when markets closed on Monday, while the tech-heavy Nasdaq 100 index was down 10.7%. Investors have dumped many tech stocks that have been boosted by Fed policy in 2020 and 2021.

Earnings season has brought its own volatility. Facebook’s parent company Meta plunged 26% on Thursday last week after its fourth-quarter numbers disappointed investors, losing $251 billion in value in the biggest one-day wipeout in history.

The following day, Amazon jumped 14% on strong earnings, gaining more than $190 billion in value in the biggest ever one-day gain in the United States.

UBS noted on Monday that companies are facing the largest rise in labor costs since the early 2000s. Still, the S&P 500 is holding up relatively well against labor costs, analysts at the bank said, although some sectors such as hospitality and retail are more exposed.

They also said the rise in bond yields, which has weighed on equities recently, is likely to continue. Still, it would be a sign that growth should be strong, they added.

UBS is among many institutions that believe the recent stock sale has gone too far. JPMorgan strategists said on Monday it was time to buy, as the Fed is unlikely to move “further into hawkish territory, at least relative to what is currently priced.”

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