UBS expects the S&P 500 index to reach 7,700 points by December 2026, with the market environment remaining supportive

Investing.com - UBS believes the background environment for the U.S. stock market remains favorable, with the S&P 500 expected to reach 7,700 points by December 2026.

The bank maintains its “attractive” rating on U.S. stocks and points out that “strong profit growth, supportive Federal Reserve policies, and the promotion of artificial intelligence” are key drivers. UBS has set a mid-term target of 7,300 for the S&P 500 in June 2026 and a year-end target of 7,700 in 2026.

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UBS strategists expect earnings momentum to remain strong, forecasting the S&P 500’s earnings per share at $277 in 2025 and $310 in 2026, representing growth of 11% and 12%, respectively.

Q4 earnings are currently trending toward approximately 14% year-over-year growth, although the pace of earnings beats has slowed, and guidance is “slightly more subdued than recent quarters but still encouraging,” said the team led by David Lefkowitz.

They noted that internal market divergence reflects a shift in leadership during the bull market cycle. While large-cap tech stocks have driven market gains in recent years, profit growth is now expanding beyond the so-called “Big Seven.” This group contributed nearly two-thirds of profit growth in 2025 but is expected to contribute about 50% this year.

The strategists also pointed out that after more than quadrupling over the past three years, capital expenditure on artificial intelligence data centers will slow down, and they noted that current investment levels have almost exhausted the entire operating cash flow of mega cloud service providers.

They added that aggressive spending driven by fierce competition may not fully translate into attractive capital returns and warned that if external investors begin to worry, this trend “becomes more vulnerable to downside risks” as financing increasingly relies on external capital.

“We believe this makes the risk-reward profile less attractive for model developers and some companies benefiting from capital expenditure,” the strategists wrote. Therefore, UBS downgraded the information technology and communication services sectors to neutral.

However, they still emphasize that “the current trend remains supportive, and we do not expect downside risks in the near term.”

Looking ahead, UBS expects the Federal Reserve to cut interest rates twice more this year, by 25 basis points each time, and states that when the Fed eases policy and the economy avoids recession, stocks historically outperform other assets.

“We believe this bull market still has room to go higher, and we maintain our year-end target of 7,700 for the S&P 500,” the strategists said.

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