UBS Predicts U.S. Economy Maintains Growth Amid Cooling Inflation

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According to a recent report from UBS, the U.S. economy is likely to experience a “no landing” scenario, where inflation remains controlled and growth persists. This promising forecast has led UBS to upgrade U.S. equities to “Attractive” and expect double-digit returns for the S&P 500 by the end of 2025.

Concerns regarding a recession were heightening during the Federal Reserve’s aggressive interest rate hikes in 2022. Nevertheless, new economic data suggests a brighter outlook, with inflation rates declining and the labor market showing surprising strength.

“The labor market is more resilient than expected,” UBS noted. “The last nonfarm payrolls came in significantly above the consensus forecast, boosting the three-month average payroll gain to 186,000. This is sufficient to accommodate new labor supply growth.”

Several factors are cited by UBS as contributing to this encouraging outlook:

Cooling Inflation: Even with some monthly ups and downs, the overall trend indicates diminishing inflation. Recent readings of the PCE index—a key indicator for the Fed—show a steady decline approaching the bank’s target.

Robust Labor Market: The recent nonfarm payrolls surpassed expectations, raising the three-month average payroll increase to 186,000. This robust performance supports the economy’s ability to integrate new workers and sustain wage growth.

Consumer Spending Power: Retail sales have seen an unexpected growth of 0.4%, surpassing market predictions despite inflation. This trend aligns with solid household financial health and rising incomes.

While the upcoming U.S. presidential election might create some market fluctuations, UBS believes its overall effect on the economy will be minimal. The bank anticipates that the Fed will continue to cut interest rates, further aiding economic growth.

“The election occurs amid Fed rate cuts, robust U.S. economic momentum, and supportive long-term trends such as artificial intelligence,” UBS points out. “We advise against simplistic assumptions regarding equity market outcomes based solely on individual policies.”

This analysis has led UBS to set a target of 6,600 for the S&P 500 by the end of 2025, which suggests a potential return of 13-14% from the current level. This optimistic view also applies to global markets, as UBS has upgraded the MSCI All Country World index to “Attractive.”

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.