A “Goldilocks” scenario in the US economy looks more likely after a strong January jobs report, according to UBS.
The scenario entails faster-than-expected economic growth with limited inflation and lower interest rates.
Such a scenario would send the S&P 500 soaring to 5,300, representing potential upside of 8%.
A “Goldilocks” scenario for the US economy is looking more likely, and it would send an already soaring stock market even higher, according to a Monday note from UBS.
A strong January employment report showed 353,000 jobs were added to the economy last month, well ahead of consensus estimates for 185,000 jobs, and representing the strongest growth in nearly two years.
While the strong report may lead the Federal Reserve to delay its interest rate cuts by a few more months, it has yet to ignite a reacceleration in inflation — and that’s great news for the stock market because it means the Fed will still cut interest rates.
“The recent strength of US data has highlighted the possibility of an even brighter outcome. In a ‘Goldilocks’ scenario, US growth would be stronger than expected, inflation would continue to slow smoothly, and the Fed would feel able to cut rates more aggressively through 2024 — with perhaps six 25-basis-point cuts,” UBS’s CIO for global wealth management in the Americas Solita Marcelli said.
In this “Goldilocks” scenario, the S&P 500 would surge to 5,300 by the end of the year, representing potential upside of 8% from current levels and an 11% gain for the entire year.
To position for a just-right US economy in 2024, Marcelli recommends investors own US small-cap stocks because they stand to benefit the most if interest rates fall.
“Nearly half the debt held by Russell 2000 [small-cap] companies is floating rate, versus around a tenth for large-cap companies, so they would likely gain more from a faster easing of Fed policy,” Marcelli said.
While UBS said to “anticipate a ‘Goldilocks’ scenario” for the US economy, its base case is still for a soft landing in which growth decelerates to slightly below its long-term trend.
This scenario is driven by mounting headwinds for the consumer due to a deterioration in housing affordability and the end of certain government benefits from the pandemic.
In a soft landing, Marcelli recommends investors buy “quality” stocks — “those issued by companies with strong returns on invested capital, resilient operating margins, and relatively low debt on their balance sheets. These companies should be able to generate profits in an environment of weaker growth.”
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