Friday’s softer-than-expected jobs report and the ongoing political transition in Europe have contributed to a recent trend of volatility in the markets.
But the negative effects on stocks may not last in the long run. In a note released this morning, UBS reiterated its year end S&P 500 target steady at 1475, and described the three economic fundamentals that will buoy markets this year.
From UBS strategist Jonathan Golub’s U.S. Equity Strategy report:
“Our outlook is predicated on three key factors: 1) Strong corporate results; 2) Our belief that markets are already discounting weaker growth; and 3) the constructive outlook of UBS economists.”
1. Corporate Strength
Q1 earnings have surprised on the upside, but analysts have not revised Q2 estimates upwards. UBS sees a possibility for a second quarter of better-than-expected earnings.
Here’s the UBS chart:
2. Weak Growth Priced In
The 10-year yield on U.S. Treasuries is down to 1.88% from a March high of 2.39%, and those stocks most exposed to economic fluctuation trade at a discount. All of this points to what UBS describes as “a market that has baked in a lot of headline risks”
3. Positive U.S. Economic Outlook
Friday’s nonfarm payroll report disappointed at 115,000, but loan demand and household formation numbers are cause for optimism in the face of a second month of weak employment growth.