UBS Predicts S&P 500 Surge as Investors Shift from Cash to Stocks

The big rotation trade is from cash to stocks - and it could help push the S&P 500 up 17% by year-end, UBS says | Business Insider India

While investors focus on the recent rotation out of large-cap stocks and into shares of smaller companies, UBS says there's an even bigger rotation trade on the horizon that investors should pay attention to. That would be the rotation from cash and bonds into stocks, according to a Monday note from the bank, and it could help fuel a 17% rally in the S&P 500 by the end of the year. With more than $6 trillion sitting in money market funds, investors could be compelled to reinvest that money in the stock market if the Federal Reserve moves ahead with rate cuts later this year. Money market funds have been yielding around 5% on an annualized basis, but that interest rate would quickly drop after the Fed cuts rates, which is expected to happen in September. The cash-to-stocks trade is the more durable rotation investors should be watching, UBS said. The small-cap rally that has captured investors' attention in recent weeks could quickly fizzle out if economic growth slows or if the Fed doesn't cut interest rates as much as expected. "There is a fine line between good macro data and ideal conditions necessary for the rotation trade to be sustained," UBS head of asset allocation Jason Draho said of the recent rally in small-cap stocks. But a lot is working in favor of the potential rotation out of cash and bonds and into the stock market, according to the note, and the move could coincide with a 17% gain in the S&P 500 by the end of the year. "We still recommend that investors position for lower rates, seek quality growth stocks, and seize the AI opportunity," Draho said. With the potential for solid economic data via continued disinflation, solid economic growth, and increased productivity from AI technologies, "it's certainly a plausible scenario" that could fuel a "Roaring '20s" outcome, which we conjecture has become increasingly likely," Draho said. And while such a scenario would help lift all stocks, it would be even better for a select corner of the market, according to the note. "This scenario should be good for small-caps and cyclical in absolute terms, but even better for tech, growth, and momentum stocks, as was the case in the late 1990s," Draho said. Draho reiterated his year-end S&P 500 price target of 5,900, but said his bull-case scenario of the index hitting 6,500 by the end of the year is still possible. "Immaculate disinflationary growth skews the outcome towards the bull case of 6500. There will be a rotation trade in that scenario, but from cash and bonds into stocks," Draho said.

A rotation trade from cash and bonds into stocks could push S&P 500 6500: UBS By Investing.com

In a note to clients Tuesday, UBS analysts highlighted the potential for a significant rotation trade that could propel the S&P 500 to 6500. They state that this shift from cash and bonds into stocks hinges on maintaining an ideal macroeconomic environment. The equity markets experienced a dramatic shift in July. The investment bank notes that previous leaders like the Nasdaq 100, which rose 16.7% in the first half of 2024, fell by 0.6% in July. Conversely, laggards such as the Russell 2000 surged by 7.6% after a modest 0.9% rise in 1H24. Regional banks and non-profitable tech stocks also saw significant gains. UBS attributes the rotation trade's potential to "steady growth at or above 2%, falling inflation, and preemptive Fed insurance rate cuts." They state that recent data has been encouraging, with inflation below expectations and disinflation trends continuing due to declining shelter inflation. Furthermore, they note that the Atlanta Fed GDPNow tracking estimate for Q2 growth rose to 2.7%, easing concerns about slowing growth. Moreover, Fed officials have implicitly supported a September rate cut by not opposing market pricing for one. However, UBS warns that investors might be overly optimistic about the extent of Fed rate cuts. The market currently prices in 65bps of cuts this year, including a likely September cut, and over 100bps in 2025. UBS says this is aggressive if growth remains around 2% and inflation above 2%. They emphasize that only an ideal macro environment can sustain the rotation trade. Investor positioning has significantly amplified the rotation trade, with increased call option activity on small-caps and surges in retail fund flows into small-cap ETFs. However, UBS expects these technical influences to dissipate soon, leaving the continuation of the rotation trade dependent on sustained ideal macro conditions. Despite the market rotation, UBS maintains its core investment strategy: positioning for lower rates, focusing on quality growth stocks, and leveraging AI opportunities. They project a year-end S&P 500 target of 5900, with a bull case of 6500, driven by "immaculate disinflationary growth" and sustained high productivity growth, particularly from AI advancements.