Wall Street Is Getting More Bullish on Stocks Despite Risks—Here's Why

• About 95% of S&P 500 companies have reported Q1 results, with earnings growing at the fastest rate in four years and companies beating estimates at an extraordinary rate, driving analysts to raise profit growth expectations at one of the fastest paces in decades
• Four semiconductor companies and the energy sector account for over half of the earnings estimate increases in the past three months, though median company growth expectations are still up 3.5% excluding the chip boom
• UBS expects the Fed to cut rates by 25 basis points in December and March (despite markets pricing 0% odds), and recommends diversifying away from mega-cap tech concentration toward international equities in Japan, Switzerland and emerging markets

Summary

Market Performance & Outlook:

UBS has raised its year-end S&P 500 target to 7,900 from 7,500, citing strong fundamentals despite mounting risks. The benchmark index is trading near 7,500 after eight consecutive weeks of gains, approaching record highs.

Key Drivers:

Strong corporate earnings remain the primary catalyst. With 95% of S&P 500 companies reporting Q1 results, earnings are growing at their fastest pace in four years. Companies are beating estimates at extraordinary rates, with the median earnings beat at nearly 6%—above long-term averages. Wall Street analysts have raised profit growth expectations at one of the fastest rates in decades.

Sector Highlights:

The semiconductor sector leads gains, driven by AI data center demand. Four chip companies plus energy account for over half of recent earnings estimate increases. Key beneficiaries include Micron, Sandisk, Nvidia, Broadcom, and AMD. However, median company growth expectations are up 3.5% even outside semiconductors.

Risks:

Rising inflation poses significant challenges. Gas prices have surged since late February to 2022 highs, while inflation hit elevated levels last month. UBS expects the Fed's next move will be a rate hike rather than the previously anticipated cut. Markets currently price zero probability of rate cuts in December or March, contrasting with UBS's forecast of 25-basis-point cuts in both periods.

Investment Recommendations:

UBS advises diversifying away from concentrated mega-cap tech positions, increasing exposure to international markets (Japan, Switzerland, emerging markets), and adding commodities as a geopolitical hedge. The firm remains optimistic that strong earnings and supportive monetary policy will offset headwinds from elevated oil prices and bond market volatility.