Bull market not over, UBS sees further gains for S&P 500 in 2017

The bull market in US stocks had further to run, UBS said.

While it was true that policy tightening by the central bank started the clock running on its demise, age alone was not what decided when the market had hit a top, they explained.

"Fed hikes "start the clock", neither valuation excesses nor signs of a recession are apparent. 2017 should see balance sheet strength, a return to earnings growth after a two year drought, and rising interest rates," they said in a research report sent to clients and dated 17 November.

Against that backdrop, Julian Emanuel, Omar Elangbawy and Michael Klaiber set a year-end 2017 target for the S&P 500 of 2,300 points, estimating earnings per share would reach $126 in 2017 and $132 in 2018.

Indeed, optimism surrounding the election of Donald Trump might set off an expansion in the valuation multiples applied to share prices, possibly pushing them as high as the 20 times' earnings typically seen at bull-market peaks, the Swiss broker said, and the S&P 500 to 2,500.

However, that would require Washington being able to pass stimulative measures without trigerring a big spike in yields.

Backing up that bullish scenario was investors' experience during the two previous United Republican administrations, in 2003-2007, when stocks gained 74%, and 1953-55, when they rose 50%.

On the downside, with the Fed likely to raise rates on 14 December 2016, and twice more in 2017, higher long-term interest rates "could porove damaging", they said.

UBS forecast that the yield on the benchmark 10-year US Treasury note would end 2017 at 2.25%.

Sector-wise, their preferred allocation was 'overweight' Financials, Technology and Healthcare. All three, but especially the latter, were attractively valued and were solid earnings growers.

Historically, Financials and Technology led in the late-stages of a bull market.

Their 'underweights' were Utilties, Telecom and Staples due to their sensitivity to rising rates and the prospect of low/passive flows to slow or reverse shift towards prioritising the search for growth.