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The call supports the view that this year’s derating reflects compressed multiples rather than any problem with earnings, which strengthens the case for buying US equities on dips into 2027. UBS’s preference for semiconductors, hyperscalers and the Nasdaq 100 over the Russell 2000 points to a continued tilt toward large-cap AI beneficiaries rather than a broad rotation. The near-term warning on positioning and technical factors suggests volatility is likely to persist into year-end. Rising oil prices are named as one of the drags on valuations, which ties the equity outlook partly to how energy markets develop. Data center construction policy after the midterms is the new variable to watch for the AI capex trade.
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Earlier:
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UBS says the S&P 500 has already been marked down for its worries, and with earnings still growing, history favours the bulls.
Summary:
- UBS kept its year-end 2027 S&P 500 target at 8,900 and set an end-2028 target of 9,600
- It forecasts EPS rising 18% to $430 in 2027 and 14% to $490 in 2028, with 8,900 equal to about 18 times 2028 earnings
- The forward P/E has fallen about 20% this year despite earnings growth of around a third, and historically the index has returned a median 20% after a P/E drop of more than 10%
- UBS warned that the near term remains volatile and driven by positioning, but sees scope for a rebound early next year
- Data center construction pauses after the midterms put about 30% of planned 2028 US capacity additions at risk
- UBS favours semiconductors, software, hyperscalers, health care and financials, and prefers the Nasdaq 100 over the Russell 2000
UBS has kept its year-end 2027 target for the S&P 500 at 8,900, arguing that this year’s sharp fall in valuations has historically set the stage for strong returns, according to a note from US equity strategist Keith Parker reported by Investing.com.
The target is built on earnings. UBS forecasts S&P 500 earnings per share will grow 18% to $430 in 2027 and a further 14% to $490 in 2028, and the 8,900 level equates to about 18 times that 2028 figure. The bank also set an end-2028 target of 9,600. Seeking Alpha reported that UBS lowered its end-2026 target to 7,900, which would leave the 2027 call about 13% higher.
Parker’s central argument is that valuations have already absorbed a lot of bad news. The index’s forward price-to-earnings ratio has fallen about 20% this year, even though earnings are on track to grow by around a third. He attributed the derating to worries about returns on AI spending and its regulation, higher bond yields and credit spreads, rising oil prices and weaker share buybacks. History offers support, he said: in years following a fall of more than 10% in the index’s P/E ratio, the S&P 500 has delivered a median return of 20%.
UBS was cautious about the near term. It described the market as highly volatile and increasingly driven by positioning and technical factors, which makes its near-term target harder to reach. Even so, it sees a growing chance of a rebound early next year once the derating and de-risking have run their course. It also expects further evidence of accelerating AI adoption through the first half of 2027.
The main risk the bank flagged is further out. State-level pauses on data center construction following the midterm elections put about 30% of planned US capacity additions in 2028 at risk, which UBS said skews 2028 risks lower. It plans to revisit its forecasts as policy details emerge, likely next year.
On positioning, UBS prefers semiconductors to tech hardware and is overweight software, hyperscalers, health care and financials. It favours the Nasdaq 100 over the Russell 2000, along with companies that have strong balance sheets.
This article was written by Eamonn Sheridan at investinglive.com.
