As investors continue to navigate the shifting landscape of the stock market, a new trend is on the horizon that could have a significant impact on their portfolios. According to UBS, there is a potential for a major rotation from cash and bonds into stocks later this year, which could fuel a 17% rally in the S&P 500 by the end of the year.
With more than $6 trillion currently sitting in money market funds, investors may feel compelled to reinvest that money back into the stock market if the Federal Reserve proceeds with rate cuts later this year. The current annualized yield of around 5% on money market funds could quickly drop after these rate cuts, pushing investors towards higher potential returns in the stock market.
UBS believes that this cash-to-stocks trade is the more durable rotation investors should be watching, as the recent small-cap rally could potentially fizzle out if economic growth slows or if the Fed’s rate cuts are not as significant as expected. Jason Draho, UBS’ head of asset allocation, stated, “There is a fine line between good macro data and ideal conditions necessary for the rotation trade to be sustained.”
The potential rotation out of cash and bonds and into the stock market aligns with UBS’ prediction of a 17% gain in the S&P 500 by the end of the year. Draho recommends that investors position for lower rates, seek quality growth stocks, and take advantage of the AI opportunities in the market.
Furthermore, UBS suggests that solid economic data, continued disinflation, economic growth, and increased productivity from AI technologies could lead to a “Roaring ’20s” outcome in the stock market. This scenario would benefit all stocks, with a particular focus on small-caps, cyclical stocks, tech, growth, and momentum stocks.
While Draho reiterated his year-end S&P 500 price target of 5,900, he believes that a bull-case scenario of the index hitting 6,500 by the end of the year is still possible. He emphasized, “Immaculate disinflationary growth skews the outcome towards the bull case of 6,500. There will be a rotation trade in that scenario, but from cash and bonds into stocks.”
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