3 things need to happen for the stock market rally to continue in 2024, according to UBS

• The stock market is already up 5% this year, and UBS thinks there could be further upside.
• UBS is encouraged by better-than-expected fourth-quarter earnings results and said the S&P 500 could rise to 5,300.
• These are the 3 things that need to happen for the stock market rally to continue in 2024, according to UBS.

The stock market has surged 21% since the end of October, and UBS thinks the rally can continue through the end of 2024 as long as three things happen.

The bank sees the S&P 500 rising an additional 6% to 5,300 by year-end in its bull-case scenario, in part driven by what has been better-than-expected fourth-quarter earnings, with earnings per share growth tracking at about 7%.

“Moreover, guidance from companies has been encouraging. At this point, we think there is upside risk to our 2024 S&P 500 EPS estimate of $240,” Solita Marcelli, UBS’s CIO for global wealth management in the Americas, said in a note on Tuesday.

But that bullish outlook was put to the test on Tuesday after a hotter-than-expected January CPI report put into question when exactly the Federal Reserve might cut interest rates. The stock market dropped by about 2% following the report.

Much of the bull case for stocks over the past few months has been predicated on a Federal Reserve cutting interest rates up to six times this year. That forecast may prove too aggressive, but as long as the economy stays resilient, the stock market could keep rising, according to UBS.

These are the 3 things that need to happen for the stock market rally to continue in 2024, according to UBS.

1. ‘More good news on the economy would be needed’

Investors have pinned much of the stock market’s rally over the past year on a solid economy that has managed to avoid a recession.

According to Marcelli, that remains an important factor in driving further stock market gains. While a weaker economy may be welcomed by some because it would lead to more aggressive interest rate cuts from the Fed, that scenario is by no means ideal.

“We believe a strong labor market will be particularly important, with jobless rates staying benign and supporting spending in consumer-focused sectors. We continue to watch the weekly initial claims for unemployment insurance to gauge the health of the labor market, but the February and March jobs reports will also be important,” Marcelli said.

2. ‘We are looking for signs that Fed cuts are delayed, but not by too much’

Delays in the Fed’s first interest rate cut from March to May or even June are not a dealbreaker, but if cuts get delayed even further, it could put the stock market rally at risk.

“The longer the Fed waits, the greater the chance of a mismatch between the Fed’s and the market’s expectations. However, if the market’s rate cut assumptions continue to get pushed out because the economy is stronger than expected, that should not be too problematic. More worrisome, in our view, would be a pickup in inflation that delays the easing cycle,” Marcelli said. 

3. ‘We are watching to see if AI monetization trends pick up’

The AI hype in the stock market helped put an end to the 2022 bear market, but now it’s time for the technology to drive a meaningful leg of profit and revenue growth for companies, according to the note. 

“We want to see more beneficiaries beyond just the household names that have already seen a material runup in their stock prices. Investors will likely want to see some more evidence that businesses and consumers are in fact adopting AI applications. From this perspective, it will be important to watch the uptake of AI tools from the software companies,” Marcelli said.