Stock market prices are rising as 2024 ends and some people are worried about a possible downturn. But UBS UBS analysts say there's no need to stress. They think prices will keep going up in 2025 because of economic changes and how businesses operate.
In their report, “22x and Beyond: The Case for Higher Valuations or How to Worry Less and Love the Market,” UBS analysts argue that today's elevated stock prices are both sustainable and logical in the current economic environment. They point to several key factors underpinning this trend.
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One reason is that, instead of accounting for just 10% of the S&P 500 index’s total value thirty years ago, tech businesses now account for 40%. These companies grow faster and make bigger profits than others and, as the report says, “The result – not surprisingly – is an upward shift in valuations for the market broadly.”
Another critical factor is the robust cash flow generated by large corporations, which need less money to run their operations. This allows them to give more back to their investors, which raises their stock prices.
Additionally, borrowing costs are still affordable even if Treasury yields are rising. According to UBS, tight credit spreads maintain a low cost of capital, which strengthens the stability of high stock prices.
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Finally, UBS says the economy is stable and stock prices tend to rise when that happens. They don't expect a recession soon, so they believe prices will continue to grow in 2025.
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Bank of America BAC analysts agree with this bullish outlook and predict the S&P 500 will reach 6,666 by the end of 2025, a 10% increase from now. They credit this to strong earnings, better productivity and shifts in which sectors perform well.
They think industries like finance, energy and consumer goods will lead the way and they see value in large-cap stocks that can handle inflation and higher interest rates. BoA also expects economic growth driven by improved productivity and believes Federal Reserve rate cuts will help the market.
While some investors like Morgan Stanley MS are cautious about the elevated price-to-earnings ratios and sound alarms about U.S. equity markets heading into 2025, UBS analysts urge them to focus on the fundamentals driving the market forward, saying, “The current premium is less about the potential of AI. Rather, it is a response to superior fundamentals, namely rapid sales growth and sustainably high EBIT margins.”
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