An AI ‘Surprise’ Could Fuel a 20% Rally for the S&P 500 in 2024, Says UBS
As the financial markets navigate through the complexities of economic indicators and policy decisions, investors are continually on the lookout for groundbreaking factors that could shape future market trajectories. And according to UBS, one such transformative element could be lurking around the corner, potentially setting the stage for a significant rally in the equity markets.
UBS’s global equities strategist, Andrew Garthwaite, and his team have spotlighted a series of unanticipated developments that could catch investors off guard. Among these, the impact of generative artificial intelligence (AI) on productivity growth stands out, promising a robust 20% return for equities in 2024. This optimistic projection would elevate the S&P 500 to an impressive 5,723.87, surpassing the bank’s base case scenario that places the year-end figure at 5,400.
The UBS team underscores the potential of generative AI to enhance work output and quality significantly. They draw parallels with past technological revolutions, which have historically lifted productivity by 1.5%-2%. The real surprise, according to UBS, may lie in the actual productivity growth rate reaching 2.5%, which could underpin a stronger-than-anticipated performance in the equity markets.
The implications of achieving such a productivity milestone are multifaceted. Not only could inflation pressures ease, prompting a quicker pace of interest rate cuts, but the economy might also find itself in a mid-cycle rather than a late-cycle phase, with unemployment rates potentially falling to as low as 2.5% to 3%. Furthermore, the risk of margin squeeze across various sectors could recede.
However, UBS cautions investors about the valuation extremes that generative AI could engender, drawing comparisons with historical episodes such as the railways and the tech, media, and telecom (TMT) boom. They remind us that during bubble periods, price/earnings ratios have soared to between 45 and 72 times, with equity risk premiums shrinking dramatically.
From their analysis, UBS identifies several preconditions for an early bubble cycle that are currently in place, including a perceived change in productivity due to technical advancements and the transitioning from a secular bull market to a period of pressured aggregate profits. They also highlight the increasing role of corporate stock purchases, which could signal an inflow of retail buying if a significant shift from money-market funds to equities occurs.
Given this backdrop, UBS advises investors to favor equities, particularly those sectors that stand to benefit from generative AI, such as software and semiconductors, while remaining vigilant against potential bubble risks.
As we look toward future market performance, the undercurrents of technological advancement and economic indicators will undoubtedly play pivotal roles. With AI’s promise to reshape productivity and, consequently, equity markets, investors may need to brace for a year of significant opportunities, underlined by a need for careful navigation through potential valuation pitfalls.
While the forecasted rally provides an optimistic outlook for 2024, it also serves as a reminder of the market’s evolving dynamics, influenced by technological advancements that continue to redefine the boundaries of productivity and growth.
