UBS Sees New S&P 500 Highs in Six Months as Earnings Underpriced

(Bloomberg) -- The stock selloff of the past couple months was outsized compared with the reasons behind it, and U.S. stocks should recover to new highs well before the end of the year, according to UBS AG’s Vinay Pande.

“The market should focus on earnings season, which should be very healthy,” Pande, the head of trading strategies at UBS Financial Services Inc., said in an interview Friday. “We don’t think earnings growth is being built into stock prices,” and “we think we should make a new high conservatively within the next six months.”

An analysis of the last five corrections in the current bull market shows that it usually takes around seven months on average for equities to climb out of their hole. That puts a time frame for new highs around August, which would be well within the six-month projection.

Pande also sees healthy growth in the U.S. and global economies continuing for some months and possibly into 2019, underpinning earnings growth through this year and giving markets a tailwind.

The main risks to the market, he says, are policy error, politics and geopolitics.

“Why has the market fallen so much? Politics and geopolitical risk is hard to quantify,” he said. Though the probability of major events in those arenas truly shaking markets is low and the episodes tend to be short-lived, “when it becomes a long-term issue, the impact is massive.”

Still, overall Pande mainly sees a case for optimism.

“There’s absolute value in the equity market, barring a disaster,” he said. “Equities were OK before, and they’re more OK now.”

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