UBS Forecasts S&P 500 to Reach 6,600 Despite Fewer Fed Rate Cuts

Investing.com -- U.S. stocks stabilized on Thursday, while U.S. Treasury yields continued to rise. Market participants adjusted their expectations for a more gradual Federal Reserve easing cycle expected to begin in 2025. The S&P 500 closed down slightly by 0.1% at 5,867, while the yield on 10-year U.S. Treasuries rose by 5 basis points to 4.57%. At the same time, the U.S. dollar index increased by 0.4% to 108.4. In the commodities market, gold prices fell by 1.7%, trading at $2,605 per ounce.

UBS analysts noted that the Federal Reserve is adopting a balancing strategy against the risk of persistent inflation above the 2% target amid potential declines in the labor market. Fed Chair Jerome Powell indicated that there is a tendency for softening in the labor market and expects this trend to continue, with a possibility of further increases in unemployment.

Despite mixed U.S. inflation data (headline personal consumption expenditures (PCE) inflation is near the 2% target, but core inflation rose to 2.8% in October), it is anticipated that the Fed will wait for core inflation rates to decline before implementing further rate cuts. Financial institutions have updated their forecasts, expecting two 25 basis point cuts in June and September 2025 instead of a previously projected 100 basis point reduction over four quarters.

This projection is based on the assumption that core inflation will slow below 2.5% by the June Federal Open Market Committee (FOMC) meeting. However, the Fed’s decisions continue to rely on incoming economic data, and weaker labor or inflation figures could lead to an earlier rate cut in March.

Despite expectations for fewer rate cuts from the Fed, UBS continues to advise investors to focus on high-quality and investment-grade bonds, diversified fixed income investments, and equity income strategies. While the urgency of positioning for low rates has diminished, UBS still finds absolute fixed income rates attractive and suggests that investors seek a variety of income sources. The firm also forecasts a positive outlook for U.S. equities, expecting the S&P 500 to reach 6,600 by the end of next year. This expectation is based on various factors, including potential policy changes under a second Trump administration.

UBS notes that while the dollar has recently been supported by changing expectations regarding Fed and government policies, it remains overvalued, advising investors to "sell any further dollar strength."