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UBS analysts told investors in a note Thursday that the firm expects an S&P 500 sell-off into the second quarter.
“With UBS econ forecasting a U.S. recession for Q2-Q4 ’23, the setup is essentially a race between easing inflation and financial conditions versus the coming hit to growth+earnings,” the analysts wrote, adding that history shows growth/EPS continue to deteriorate into market troughs before financial conditions ease materially.
“We forecast S&P 500 2023 EPS to fall >11% to $198 with margins declining below ’20 levels for S&P ex Fins/Energy. We see 3200 in Q2 on 14.5x fwd EPS of $220 as a reasonable trough assuming further cuts to estimates in line with a pre-recession pace,” added UBS.
However, it sees a fall in Baa corp yields after the Fed cuts in Q3 starting a rebound.
“We target 3900 for the S&P 500 at the end of ’23 based on EPS of $215 in ’24, in line with trend levels, and a fair value forward P/E of 18x, which assumes a sub 3% U.S. 10y yield. The upside case of rapidly easing inflation amid slow growth could see the S&P rise to 4400 in ’23, similar to rallies after CPI y/y falls fast,” they concluded.
Despite a positive start to the year, U.S. indices have dipped on Thursday, with the S&P 500 down over 1% at the time of writing.
