UBS analysts said Tuesday that stronger U.S. earnings growth should support stocks.
The US first-quarter earnings season began with UBS noting mixed results from several of America’s largest banks.
The S&P 500 is trading at 20 times analysts’ 12-month forward earnings forecast, compared with an average of about 15 times since 1985. Even after last week’s setback, the S&P 500 is still up about 16% over the past six months.
In addition, UBS said rising yields make stocks less attractive compared to government bonds amid concerns that the Federal Reserve will keep rates high for longer.
However, despite these potential headwinds, the bank believes the risk of a significant sell-off is manageable and that upcoming earnings releases should support the market.
“The seven largest U.S. growth and technology companies collectively accounted for all of the earnings growth over the past four quarters,” the bank added. “We expect the situation to change in the first quarter. That partly reflects the positive economic backdrop, with surveys pointing to a return to expansion in manufacturing activity at a time when banks are easing lending standards – both of which correlate well with S&P earnings. “
Once final results are reported, the S&P 500, excluding the Magnificent Seven, is expected to post positive, “albeit modest” earnings growth in the first quarter from the fourth quarter of 2022.
“Non-G7 earnings growth should accelerate over the remainder of the year, consistent with data indicating both improved manufacturing sentiment and easing bank lending standards,” UBS said.
The bank believes that improving earnings trends should impact small-cap companies.