UBS: Broadening earnings growth signals support for stocks

  • Stock Market News
UBS: Broadening earnings growth signals support for stocks
Credit: © Reuters.

Analysts at UBS said in a note Tuesday that the broadening of US earnings growth should underpin stocks.

The first-quarter US earnings season has kicked off with UBS noting there has been mixed results from several of America's largest banks.

The S&P 500 is trading at 20 times analysts' 12-month forward earnings forecast versus an average of closer to 15 times since 1985. Even after last week's setback, the S&P 500 is still up around 16% over the past six months.

In addition, UBS says that rising yields make stocks look less attractive relative to government bonds, amid concerns that the Federal Reserve will keep rates higher for longer.

However, despite these potential headwinds, the bank believes the risk of a significant sell-off is manageable and that upcoming profit releases should support the market.

"America's top seven growth and tech firms collectively accounted for all of the profit expansion over the past four quarters," added the bank. "We expect this to change in the first quarter. This partly reflects a positive economic backdrop, with surveys pointing to a renewed expansion of manufacturing activity at the same time as banks are easing lending standards—both of which have a good correlation to S&P profits."

Once the final results are tallied, it is believed that the S&P 500, excluding the Magnificent 7 will post its first quarter of positive, "albeit modest," profit growth since the fourth quarter of 2022.

"Profit growth for the non-Magnificent 7 should accelerate over the remainder of the year, consistent with data indicating both improving manufacturing sentiment and easing in bank lending standards," stated UBS.

The bank feels that the improving profit trends should trickle down to small-cap companies.

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