S&P 500 Index: Equity market optimism is justified – UBS

The S&P 500 rose 1.8% last week, its best weekly advance since July. Economists at UBS still believe the optimism in equity markets is justified, given robust economic growth and earnings.

Solid start to the US earnings season

“We expect a drag on earnings per share from supply chain problems of just 1% for 2021 – a modest hit relative to our projection for 45% profit growth for the year.”

“We continue to believe the Fed will look through the current spike in inflation. US average inflation data suggests the Fed doesn’t need to act: On two, three, and five-year rolling averages, core PCE inflation remains well below 2%.”

“As the labor market continues to recover we expect yields to rise to 1.8% this year, a gradual increase that has historically been consistent with rising equities.”

“Although the third quarter earnings season won’t match the second, we still expect roughly 30% earnings growth in the third quarter, representing a 5% beat of consensus expectations.”