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UBS tells investors to buy the dip in US stocks on the back of strong earnings, and predicts the S&P 500 will rally 8% this year

Feb 8, 2022, 19:34 IST
Business Insider
Stocks, particularly in tech companies, have fallen sharply in 2022.John Smith/VIEWpress/Getty Images
  • UBS said investors should buy the dip in US stocks on the back of strong company earnings.
  • The investment back expects the S&P 500 to rally 8% to 4,850 by the end of the year.
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Investment bank UBS has recommended investors "buy the dip" in US stocks, saying the fourth-quarter earnings season has bolstered the argument for owning equities.

The S&P 500 will rally to 4,850 by the end of the year, UBS predicted, which would be an 8% increase from Monday's closing level of 4,483.87.

"Stronger earnings is the reason we recommend buying the dip," UBS analysts, including head of US equity strategy Keith Parker, said in a Monday note.

The analysts said S&P 500 companies have beaten earnings expectations by 10% on aggregate, and sales expectations by just under 3%.

The companies are on track to report earnings growth of more than 25% for the fourth straight quarter, according to data provider FactSet.

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Stocks have been on a wild journey in 2022, as investors prepare for the Federal Reserve to raise interest rates in an effort to tame the strongest inflation in 39 years.

The S&P 500 was down 5.9% for the year when markets closed Monday, while the tech-heavy Nasdaq 100 index was 10.7% lower. Investors have dumped many of the technology stocks that were boosted by Fed policy in 2020 and 2021.

Read more: A stock-picking expert lays out why these 3 companies are an ideal way to tap into the metaverse as virtual worlds boom in popularity - and explains why Metal could bounce back

Earnings season has brought its own volatility. Facebook parent Meta plunged 26% on Thursday last week after its fourth-quarter figures underwhelmed investors, losing $251 billion of value in the biggest one-day wipeout in history.

The next day, Amazon jumped 14% on the back of strong earnings, gaining more than $190 billion in value in the biggest ever one-day gain in the US.

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UBS noted on Monday that companies are facing the strongest rise in wage costs since early 2000. Yet the S&P 500 is relatively resilient to labor costs, the bank's analysts said, despite some sectors such as hospitality and retail being more exposed.

They also said a rise in bond yields, which has recently weighed on stocks, is likely to continue. Yet this would be a sign that growth is expected to be strong, they added.

UBS is among many institutions to think the recent sell-off in stocks has gone too far. JPMorgan strategists on Monday said it's the time to buy, as it's unlikely that the Fed will move "further into hawkish territory, at least relative to what is priced in currently."

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