- The S&P 500 will fall to 3,200 points before it hits a low in Q2 next year, UBS has forecast.
- US stocks won’t recover until the Federal Reserve starts cutting interest rates, the bank said.
- “The speed of that pivot will drive every asset class next year,” UBS strategists said Monday.
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The S&P 500 US stock index could fall another 16%, before bottoming out in nine months’ time once the Federal Reserve switches away from hiking interest rates, UBS has forecast.
The Swiss bank’s strategists laid out this scenario in a Monday note: “Weak growth and earnings drag the market lower before a fall in rates helps it bottom at 3,200 in Q2 ’23 and lifts it to 3,900 by end ’23.”
The S&P 500 would have to fall 15.9% from its Monday close at 3,806 to reach that low level.
The benchmark index has already slumped 20.1% year-to-date, weighed down by the Fed’s tightening campaign, recession fears, and poor third-quarter earnings performances by Big Techs like Amazon and Facebook parent Meta Platforms.
UBS expects a slowdown in economic growth to carry on dragging stocks down until the second quarter. It also projected year-on-year global GDP will rise just 2.1% in 2023 — which would be the third-lowest expansion in the past three decades.
“Our forecast approaches something akin to a ‘global recession’,” a UBS team led by chief economist Arend Kapteyn said in a note to clients.
“For the US, we now expect near zero growth in both 2023 and 2024, and a recession to start in 2023,” they added.
That economic slump would likely lead to a period of disinflation, they said. Given the US central bank has increased interest rates rapidly to try to tame inflation running at 40-year highs, that would give policymakers scope to switch to cutting rates to stimulate economic growth.
“Combined with inflation falling rapidly, the Fed would cut the federal funds rate down to 1.25% by early 2024,” the strategists said. The rate is currently at 3.75%.
“The speed of that pivot will drive every asset class next year,” they added.
Expectations of a Fed pivot could lift the S&P 500 to 3,900 points — a 2.4% gain from its close Monday – by the end of 2023, according to UBS.
The bank also predicted that future rate cuts will lead to 10-year US Treasury yields slipping 155 basis points to 2.65% and the dollar slowly falling the ten most heavily-traded currencies as well as gold.