UBS is bullish on US equities: the earnings-driven rally is not over, with the S&P 500 target raised to 8,100 by end-2026 and 8,900 by end-2027

Overview

This is a UBS US equity strategy market outlook presentation. The main thesis is that US equities remain in an earnings-driven uptrend phase, while the market is underpricing higher 3- to 5-year forward sales growth, cash flow return on investment, and AI diffusion effects. The report breaks the next leg of the rally into four types of multiplier effects: a steeper AI demand curve, capex broadening from tech into a wider range of industries, easing policy uncertainty, and improving cash flow and financing demand.

Core views

The core views are: first, the S&P 500 still has upside, with targets of 8,100 by end-2026 and 8,900 by end-2027; second, the AI investment cycle is still early, and the growth-valuation trade-off for semiconductors and Hyperscalers remains attractive; third, capex broadening is stronger than consumption broadening, so industrials, capital goods, and transportation are favored over consumer discretionary and retail; fourth, private-sector releveraging and deregulation benefit financials, banks, investment banks, and consumer finance; fifth, healthcare benefits from health consumption, GLP-1 penetration, and declining policy uncertainty, outperforming consumer staples; sixth, energy over non-metal materials can express themes of power demand, commodity production, and shareholder returns.

Analysis framework

The report combines index earnings forecasts, forward sales CAGR, CFROI, valuation mean-reversion models, sector and subsector scorecards, capital supply, stock volatility and correlation, capex, credit and equity issuance, and regulatory and policy uncertainty indicators to build a top-down US equity strategy framework, which is then mapped further into sectors, subsectors, and tradable themes.

Methodology notes

• Earnings ForecastingS&P 500 EPS and NTM Earnings Framework

  Earnings-driven rally

  The report uses an expected roughly 25% rise in NTM earnings over the next 18 months as its core assumption, arguing that the index can still move higher even if the P/E multiple declines by about 1 turn.

• Valuation methodsS&P 500 P/E Multivariable Model

  Growth and CFROI support valuation

  Model variables include the US 10-year yield plus investment-grade spread, economic surprises, the spread between the 1-year rate and the federal funds rate, 3- to 5-year sales growth, cash flow ROI, stock volatility relative to rate volatility, sales growth inflection, and dividend payout ratio.

• Thematic InvestingAI Flywheel Framework

  AI investment, revenue, cash flow, and valuation cycle

  The report focuses on data-center capex, compute activity, frontier LLM revenue growth, Hyperscalers backlog, and free-cash-flow inflection points, concluding that AI growth is not yet fully reflected in valuations.

• Sector AllocationSector and Subsector Scorecard

  Integrated ranking of fundamentals, trend, value, and volatility

  The report compares technology, financials, healthcare, industrials, energy, materials, and consumer sectors through sector and subsector scorecards, and provides recommendations on relative longs/shorts and funding sources.

• HOLTUBS HOLT and CFROI Methodology

  Cash flow return on investment and intrinsic value

  The disclosure section states that the HOLT valuation model is a discounted cash flow tool that uses third-party financial, pricing, and earnings data with consistency adjustments to assess corporate returns on capital and growth.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• S&P 500 / SPX

  Core bullish exposure and index target vehicle

  Strengths

  Upward earnings revisions, forward sales growth, and improving CFROI support valuation, with targets pointing to 8,100 by end-2026 and 8,900 by end-2027.

  Weaknesses

  Rates and credit spreads may pressure the P/E multiple, and index concentration may also increase volatility sensitivity.

  Comparison

  The report believes current valuation has not fully priced in stronger growth and a Goldilocks environment.

  Risks

  Macro shocks, renewed policy uncertainty, weaker-than-expected earnings, and greater-than-expected de-rating.

• Semiconductors

  Preferred long direction within the AI flywheel

  Strengths

  Strong AI demand, high growth rates, and low P/E relative to sales and EPS CAGR.

  Weaknesses

  Highly sensitive to Hyperscalers capex, AI revenue realization, and cycle expectations.

  Comparison

  Versus the broader tech sector, semiconductors are described as high-growth with a relatively low valuation-to-growth ratio.

  Risks

  A slowdown in AI spending, inventory cycle reversal, cloud-provider cash-flow pressure, and valuation reset.

• Hyperscalers

  Opportunistic add-on exposure under accelerating AI cloud revenue

  Strengths

  Cloud sales backlog exceeds 100% of total sales, sales growth is accelerating, and the valuation-growth ratio is at a multi-year low.

  Weaknesses

  Free-cash-flow yield is low, and capex as a share of operating cash flow is high.

  Comparison

  The report recommends adding exposure opportunistically when signals of accelerating revenue and improving cash flow appear.

  Risks

  Capex returns below expectations, declining OCF conversion, and insufficient AI monetization revenue.

• Industrials, Capital Goods, and Transportation

  Beneficiary assets of the capex broadening theme

  Strengths

  A sizable share of S&P 500 companies are expected to raise capex, while capital-goods order growth and a transportation cycle recovery support returns.

  Weaknesses

  Highly dependent on a manufacturing recovery, corporate investment, and a rebound in freight pricing.

  Comparison

  The report prefers industrials over consumer discretionary and recommends going long capital goods and transportation.

  Risks

  A stalled manufacturing recovery, order declines, higher fuel costs, or demand below expectations.

• Consumer Discretionary and Retail / XRT

  Funding source or relative short under pressured consumption

  Strengths

  Can serve as a hedge or funding source for long thematic exposures.

  Weaknesses

  Real wage growth is below 1%, and low savings plus labor-market pressure weaken consumer resilience.

  Comparison

  The report argues industrials are superior to consumer discretionary, and that retail may underperform in a low-real-wage environment.

  Risks

  If real wages and consumption reaccelerate, related short or funding-source expressions may underperform.

• Financials, Banks, Investment Banks, and Consumer Finance

  Long direction for private-sector releveraging and deregulation

  Strengths

  Rising dividends and buybacks, improving ROE/CFROI, deregulation, and recovering corporate borrowing and trading activity.

  Weaknesses

  Sensitive to the credit cycle, yield curve, capital rules, and trading activity.

  Comparison

  The report prefers financials over REITs and is positive on banks, investment banks, and consumer finance.

  Risks

  Credit deterioration, renewed regulatory tightening, adverse yield-curve moves, and weaker-than-expected trading activity.

• Healthcare, Pharmaceuticals, and Biotechnology

  Long direction driven by health consumption and easing policy uncertainty

  Strengths

  Health consumption exceeds $7 trillion and is growing about 7%, GLP-1 adoption is changing consumption structure, and pharma/biotech sales CAGR and M&A are improving.

  Weaknesses

  Patent cliffs, R&D failures, and policy changes may still affect earnings.

  Comparison

  The report prefers healthcare over consumer staples, arguing that the valuation discount does not reflect better growth momentum.

  Risks

  Renewed drug-pricing policy pressure, clinical failures, M&A regulation, and uncertainty around the pace of GLP-1 commercialization.

• Consumer Staples

  Funding source within the healthcare relative long

  Strengths

  Relatively defensive characteristics.

  Weaknesses

  The report says its P/E is close to tech, but sales CAGR is about 4%, and 12-month forward ROI is nearly 20 percentage points lower than IT.

  Comparison

  Healthcare offers more attractive growth and valuation than consumer staples on a relative basis.

  Risks

  If the market turns defensive, consumer staples may relatively outperform.

• Energy over Materials (ex-metals)

  Expression of power demand, commodity production, and shareholder return themes

  Strengths

  Energy free-cash-flow yield and total return are more attractive than materials, while refining margins are elevated.

  Weaknesses

  Sensitive to oil and gas prices, demand, and the policy environment.

  Comparison

  The report proposes energy over materials (excluding metals) as one way to express the theme.

  Risks

  Falling commodity prices, weaker demand, policy constraints, and lower-than-expected capex returns.

Key data

• S&P 500 target8,100 by end-2026; 8,900 by end-2027The report says the target is based on the continuation of the earnings-driven rally.
• NTM earnings outlookExpected to rise by about 25% over the next 18 monthsThe report believes the index still has upside even if the valuation multiple falls by about 1 turn.
• Fair P/E frameworkAbout 24x S&P P/ESupported by higher 3- to 5-year forward sales growth and CFROI.
• AI technology spending cycleAbout 2 years into the cycle; historically, tech spending cycles can last about 10 years with about 20% CAGRUsed to support the view that the AI cycle is still early.
• Semiconductor valuation-growth ratioAt a 25%+ growth rate, P/E to sales CAGR is about 0.9x and P/E to EPS CAGR is about 0.7xThe report uses this to recommend staying long semiconductors.
• Hyperscalers backlogCloud sales backlog exceeds 100% of total salesThe report believes Hyperscalers can be added opportunistically.
• Capex broadeningMore than 45% of S&P 500 companies are expected to post NTM capex growth above 10%Supports an allocation to industrials and capital goods over consumer sectors.
• Data center planned capacity115% year-over-year growthPositive for capital goods, industrials, and power-related investment chains.
• Financial sector shareholder returnsTotal payout and buyback return of about 5% for financials, with dividends up about 50% year over yearCombined with deregulation, improving corporate borrowing, and stronger trading activity.
• Bank capital capacityPotential excess capital of about $300 billionThe report uses this to support its bullish view on banks, investment banks, and consumer finance.
• Health consumption marketMore than $7 trillion, growing about 7%Supports an allocation to healthcare over consumer staples.

Impact & implications

If the report’s judgment proves correct, the next leg higher in US equities will be driven more by upward earnings revisions and broader growth diffusion rather than pure multiple expansion. At the portfolio level, positioning should tilt toward sectors benefiting from AI capex, corporate releveraging, deregulation, and healthcare demand, while pressured consumer segments, expensive consumer staples, and some REITs can serve as funding sources. From a risk-management perspective, single-stock volatility remains high and correlation remains low, so options strategies can be used to finance upside exposure or reshape downside risk.

Risks

• Global equity investing faces currency, country, sector, and company-specific risks.
• Valuations may be affected by changes in company fundamentals, investor risk appetite, the macro environment, and financial market stability.
• Multi-asset investing also involves market risk, credit risk, interest-rate risk, and FX risk, and inter-asset correlations may deviate from historical patterns.
• Geopolitical events and policy shocks may reduce asset returns.
• During periods of high volatility, weak liquidity, and economic dislocation, valuations may be adversely affected.
• If AI capex is not supported by revenue and cash-flow growth, semiconductor and Hyperscaler themes may come under pressure.
• Higher rates or wider credit spreads may compress market P/E multiples.
• If consumption is stronger than expected, strategies using retail and consumer discretionary as funding sources may perform poorly.

What to watch

• Whether upward revisions to S&P 500 NTM EPS continue to materialize.
• Whether 3- to 5-year forward sales CAGR and CFROI continue to improve.
• Hyperscalers cloud revenue, backlog, OCF margins, and capex as a share of OCF.
• Whether semiconductors’ P/E-to-sales CAGR and P/E-to-EPS CAGR remain low.
• US manufacturing, capital-goods orders, transportation pricing, rail volumes, and the inventory cycle.
• US non-financial corporate debt growth, IPOs, M&A, and buyback trends.
• Bank capital, CFROI, dividends and buybacks, and progress on deregulation.
• Healthcare policy uncertainty, GLP-1 adoption, pharma/biotech sales CAGR, and M&A activity.
• Single-stock volatility, correlation, CTA positioning, and options market dynamics.