S&P 500 Index: Rally to continue as the US economic recovery gains momentum – UBS

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The S&P 500 hit a record high last week, despite investor anxiety over the threat of rising inflation and higher bond yields. Over the last month, the market’s advance has been led by cyclical sectors. Economists at UBS see a continuation of this trend, as investors respond to the passage of US stimulus, central bank support, and progress in combating the pandemic.

See: S&P 500 Index to climb towards 4100 by end-2021 – Deutsche Bank

Key quotes 

“The $1.9tr stimulus bill was substantially larger than had been expected earlier in the year. Its provisions are also highly supportive for consumption and growth. The bill included direct payments of $,400 to a majority of Americans, which will be sent out this week, along with an additional $300 a week for the unemployed. This windfall comes on top of existing signs of pent-up demand from US consumers, including a 5.3% rise in retail sales in January with February data out this week. Combined, this creates upside risk to our 6.4% GDP growth forecast for the US in 2021.”

“Central banks are supporting the recovery and are willing to combat an unjustified rise in yields. The European Central Bank suggested that the Eurozone’s economic recovery could be hampered by the rise in bond yields. It said it would accelerate its pace of bond buying in the next quarter to stop unwarranted tightening of financial conditions. The Reserve Bank of Australia has also been pushing back against rising yields by increasing the pace of bond purchases. Meanwhile, the Federal Reserve has suggested that it is willing to let the economy run hot.”

“While moves to reopen have been uneven around the world, countries that are most advanced in vaccination have been moving toward normalization, pointing to a positive trend in the coming months.”

“We continue to see developments supporting the upside for equities. As growth accelerates, we think cyclical parts of the market will outperform, including small caps and emerging markets.”