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The S&P 500 will jump 12% to 5,000 next year as corporate profits fuel stock-market gains, UBS says (INX, SPY, DJIA, COMPX)

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The bull run in US stocks is ready to stretch into 2022, with an already scorching rate of increased profit for Corporate America set to propel the S&P 500 index to 5,000 by the end of next year, according to UBS Global Wealth Management. 

"Yes, the rally off the COVID-19 bottom in March 2020 has been extraordinary, but we think there are further gains ahead. Solid economic and corporate profit growth, in conjunction with a still-accommodative Fed, means that the environment for stocks remains favorable," said David Lefkowitz, head of Americas equities, in a note published Monday. 

On that foundation, UBS initiated its 5,000 target for year-end 2022 on the broad measure of US stocks. The projection would leave the index 12% higher from Monday's close. It also raised its S&P 500 projections for December 2021 and June 2022, to 4,600 and to 4,800, respectively. 

The S&P 500 on Tuesday traded around record highs. This year, it's been adding to a collection of new highs largely as companies have posted better-than-expected earnings reports and profit forecasts as the economy recovers from COVID-19. UBS said 85% of S&P 500 companies have surpassed Wall Street's second-quarter expectations and earnings growth of 90% from a year earlier was ahead of its projection for an 80% increase. 

"Despite some investor concerns about rising costs, revenue growth has been so robust—25% in 2Q—that it is overwhelming the cost pressures, and S&P 500 profit margins hit a multi-decade high in the quarter," said Lefkowitz. 

UBS upwardly revised its per-share earnings estimates for S&P 500 companies, citing its favorable outlook for the economy. "Consumer balance sheets are the strongest in decades after households amassed trillions in savings over the last year. Moreover, employment is recovering, and recent jobs data has been better than expected. So even though consumer spending was subsidized by government stimulus during the height of the pandemic, continued job growth should propel consumer spending higher," said Lefkowitz. 

UBS now sees earnings rising 45% in 2021, to $207 a share, and growing by another 10% in 2022, to $227 a share. The 2022 profit view includes a drag of 4% to 5% from higher corporate taxes. The Biden administration is proposing a hike in the corporate tax rate to 28% from 21%. "These estimates are higher than bottom-up consensus estimates, suggesting further upwards earnings revisions," said Lefkowitz of the firm's earnings outlooks. 

He said the recent increase in COVID-19 cases may be stoking somewhat of a pullback in activity, especially in the travel and entertainment segments. But a dent in economic growth should be modest as Delta variant cases in the US could peak by the end of August, following the pattern in some European countries that had earlier outbreaks. 

Meanwhile, the Federal Reserve should remain accommodative with monetary policy, said UBS. Investors have been concerned that if inflation stays around multi-year highs,  the Fed will raise interest rates and that could crimp economic growth.

"But we think the inflation story is shifting," in part as commodity prices have stopped rising over the last several months and that there's been "scant" evidence that wage increases are broad-based, it said. 

"This is crucial. Inflation could become more persistent and problematic if wage pressures start to prompt a broad-based increase in prices. With the labor force still 5.7 million jobs smaller than pre-pandemic levels, there should be sufficient slack in the labor market to keep inflationary pressures at bay," said Lefkowitz.

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