Will the bull market continue after new highs in the US stock market? UBS is bullish: high valuations but not a bubble, optimistic about sectors like AI and electricity

According to the Zhitong Finance APP, UBS has released its latest UBS House View report. The report points out that the U.S. stock market has repeatedly reached new highs in the past week, thanks to better-than-expected performance in the second quarter, particularly from energy-related companies, and the increased likelihood of the Federal Reserve cutting interest rates in September. UBS believes there is still room for further development in the U.S. bull market, forecasting that the S&P 500 index will reach 6,800 points by June 2026. For investors with insufficient stock allocations, it is advisable to consider gradually increasing their investment proportion and taking advantage of market pullbacks to increase allocations in related sectors.

First, UBS points out that the U.S. stock market is at historical highs, and valuation levels are quite high. Last week, the S&P 500 index hit a new high, rising 30% from its low in April. Compared to the long-term average of traditional benchmarks, the current valuation levels are elevated. The expected price-to-earnings ratio of the S&P 500 index is 22.5 times, and the Shiller cyclically adjusted price-to-earnings ratio is 37.9 times, both of which are at the 99th percentile level over the past 20 years. Additionally, there are signs of bubbles, such as strong performances from meme stocks and significant increases in some initial public offerings during their initial trading.

However, UBS does not believe there is a bubble in the market, as corporate earnings are growing. The bank recently raised its earnings per share forecast for the S&P 500 index to $270 for 2025 (an 8% increase) and $290 for 2026 (a 7.5% increase). Investor sentiment does not seem overly optimistic: surveys from the American Association of Individual Investors have shown net bearish sentiment in recent weeks. Institutional holdings also appear cautious. One common cause of historical bubble bursts—rising interest rates—is unlikely to occur in the short term. UBS expects the Federal Reserve to begin cutting rates by 100 basis points in September.

Therefore, UBS suggests that investors who are under-allocated in stock investments consider finding ways to increase their long-term investment weight. Gradually entering the market is an effective strategy that can capture mid-term and long-term upward opportunities while effectively managing timing risks and uncertainties in the coming months. Among these, UBS remains optimistic about the long-term growth potential of artificial intelligence, electricity, and energy.

Currently, the price-to-earnings ratios of tech giants are far lower than those of tech companies at the peak of the internet bubble. For example, major leading companies from the internet era—Microsoft (MSFT.US), Cisco (CSCO.US), Lucent, Nokia (NKA.US), and AOL—had an average expected price-to-earnings ratio of 82 times in 1999, significantly higher than the average expected price-to-earnings ratio of 28 times for the "Magnificent Seven" over the past 12 months.

Data from the Financial Industry Regulatory Authority indicates that the margin debt ratio, as part of market capitalization, rose from 1.7% in May 1999 to 2.6% at the peak of the internet bubble in March 2000. Currently, this ratio stands at 1.8%, not far from the 30-year low of 1.5% In short, UBS believes that the U.S. stock market is performing robustly, repeatedly reaching new highs recently, and is expected to continue rising in the next 6 to 12 months. UBS has a "neutral" rating on U.S. stocks, but this is not a "negative" stance. UBS is particularly focused on specific sectors in the U.S., including financials, technology, healthcare, utilities, and communication services, while also looking for structural growth opportunities in areas such as artificial intelligence, electricity, and energy.