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The S&P 500 Could Rally 20% in 2024 Due to an Ai Surprise, According to Ubs

February 29, 2024
minute read

Bidding farewell to an unusually prolonged February, marked by Wednesday poised to deliver its most robust monthly return since 1998. The Federal Reserve's preferred inflation gauge, recently released, brought no surprises, leading to a sense of relief in the markets.

Our focus today revolves around unforeseen scenarios, as UBS's global equities strategist, Andrew Garthwaite, and his team present a collection of unexpected possibilities that may not be on investors' radar.

The most noteworthy prediction is as follows: "Generative AI has the potential to drive productivity growth to 2.5%, resulting in a 20% surge in equities by 2024." This optimistic outlook would propel the S&P 500 to 5,723.87. (It's worth noting that UBS's baseline projection places the S&P 500 at 5,400 by year-end.)

The analysts acknowledge the current impact of this emerging technology on work output and quality, drawing parallels to the productivity surge witnessed during the information and communication technologies revolution. Investors might be anticipating a similar boost from Generative AI.

However, they caution against overlooking the historical timeline. UBS points out that despite former Fed Chair Alan Greenspan signaling rising productivity in 1996, it wasn't until February 2000 that the 5-year average of productivity exceeded 2.5%. By then, the Nasdaq had tripled.

If the average productivity is indeed 2.5%, contrary to the 1.5% assumed by UBS economists and the Fed, this could imply lower-than-expected inflation and faster-than-anticipated rate cuts. Additionally, an undershoot in inflation might categorize the economy as mid-cycle rather than late-cycle, with full employment estimated at under the 4.1% projected by the Fed, possibly around 2.5% to 3% unemployment.

Furthermore, a margin squeeze would likely diminish under these circumstances. Yet, the analysts caution that a perceived shift in business models due to Generative AI introduces the risk of extreme valuations, similar to historical instances with railways, the technology boom, and the media and telecom wave.

During periods of market bubbles, price/earnings ratios can reach elevated levels, ranging from 45 to 72 times, and equity risk premiums may drop significantly. Garthwaite identifies five out of eight preconditions for an early-bubble cycle at present, including a perceived change in productivity driven by technical advancements, a minimum gap of 25 years from a prior episode, and the end of a secular bull market.

Two additional preconditions, central banks printing money and heavy retail stock buying in a money-market to equities switch scenario, are not ruled out. The analysts advocate for a long position in equities, especially in areas benefiting from Generative AI, such as software and semiconductors, while emphasizing the need for caution regarding potential bubbles.

Market reactions indicate positive movements in stock futures and steady Treasury yields following the release of PCE data meeting expectations. The Bank of Japan suggests a reassessment of loose monetary policy, leading to a surge in the yen. Bitcoin hovers below $63,000.

In other news, headline PCE inflation and core measures align with expectations, while weekly jobless claims rise. Pending home sales are anticipated at 10 a.m., accompanied by various Fed speakers throughout the day.

Snowflake shares experience a 20% decline post-disappointing results and CEO departure, while HP slips after meeting estimates. AMC reports a revenue beat attributed to Taylor Swift and Beyoncé but faces a stock decline.

Viking Therapeutics issues new shares after promising data on a weight-loss drug, and WW International sees a 23% drop as Oprah Winfrey departs from the board after using a weight-loss drug.

The SEC reportedly investigates whether OpenAI misled investors.

Best of the web highlights a personal account of losing $240,000 through a cryptocurrency investment encouraged by an Instagram acquaintance, efforts to preserve Italy's iconic dish, and the U.S. Labor Department causing confusion with a consumer prices email.

In the realm of retail sentiment, Nvidia emerges as the new bellwether, but interest in it still falls short of the fervor surrounding Tesla in 2023, according to Vanda Research. The chart illustrates the comparative retail flows into NVDA and TSLA stocks during the mentioned period.

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Eric Ng
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Adan Harris
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Cathy Hills
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