Quality and profitable companies with strong balance sheets will have stocks with greater earnings as the economy suffers weakening growth, said UBS analysts.
UBS analysts, in their Year Ahead 2024 report, said that the equity market will rally moderately in 2024 as earnings grow and interest rates are expected to fall.
They see the S&P 500 (NYSEARCA:SPY) rising to 4,700 by December 2024 and a 9% increase in EPS.
“We think that leaner inventories, one-off base effects in healthcare, and earnings contributions from the technology sector and other quality companies should offset cyclical headwinds from slower U.S. economic growth,” UBS analysts wrote.
UBS does not discount macroeconomic and geopolitical issues that create uncertainty around earnings.
“The MSCI All Country World Index (ACWI) is trading at 15.9 times 12-month forward price-to-earnings, roughly 10% above its 15-year average,” they added. But the MSCI ACWI Quality Index has historically outperformed the MSCI (ACWI) by 1 percentage point over six-month periods where growth slowed but stayed positive.
UBS expects this to repeat in 2024.
Quality stocks have outperformed even in periods of economic contraction, compared to the overall index.
Tech stocks, especially those incorporating AI, should be the ones that will be recession-proof, UBS analysts said.