Wall Street tipped to smash more records this year

Fresh S&P 500 index upside has been forecast by a leading bank after it said that strong earnings momentum in the current US results season was more than just about artificial intelligence (AI).

UBS Global Wealth Management sees the Wall Street benchmark adding another 9% to reach a record of 8,200 by next June, having already rallied by 18% since the end of March.

• Invest with ii: Buy US Stocks from UK | US Earnings Season | How to Buy Shares

Its upside scenario of 9,000 is based on factors such as better-than-expected AI investment spending and adoption, as well as benign tariff policy and geopolitical de-escalation. The downside scenario target is 5,500.

UBS said: “We believe that the bull market has further to go and that the key drivers remain intact: solid earnings growth, supportive monetary policy, and AI investment and adoption.”

Its estimates point to earnings per share growth of 20% across 2026, followed by a further increase of 12% to $375 in 2027.

The results season is now at a key stage, with Google owner Alphabet Inc Class A (NASDAQ:GOOGL) due tonight before fellow hyperscalers Meta Platforms Inc Class A (NASDAQ:META) and Microsoft Corp (NASDAQ:MSFT) on 29 July and Apple Inc (NASDAQ:AAPL) and Amazon.com Inc (NASDAQ:AMZN) on 30 July.

One of the biggest events of the season will be on 4 August, when Elon Musk posts Space Exploration Technologies Corp Class A (NASDAQ:SPCX) results for the first time since its record stock market debut. NVIDIA Corp (NASDAQ:NVDA) reports results on 26 August, with Micron Technology Inc (NASDAQ:MU) not until the end of September.

Palantir Technologies Inc Ordinary Shares - Class A (NASDAQ:PLTR) posts figures after the closing bell on 3 August, Berkshire Hathaway Inc Class B (NYSE:BRK.B) earlier the same day and Walmart Inc (NASDAQ:WMT) before the start of trading on 20 August.

About a fifth of the S&P 500 had presented their figures by last week, with Bank of America noting that 88% of companies were ahead of expectations in the strongest Week 1 in more than three years and well above the historical average of 68%.

Standout performances came from the banking sector, with resilience on Main Street as well as much stronger capital markets helping The Goldman Sachs Group Inc (NYSE:GS) to beat earnings forecasts by 45%.

• Chancellor Healey’s big tax and pension dilemma
• The FTSE 100 results you won’t want to miss this summer
• L&G among these three top income picks

Taiwan-based semiconductor foundry Taiwan Semiconductor Manufacturing Co Ltd ADR (NYSE:TSM) and Nasdaq-listed ASML Holding NV ADR (NASDAQ:ASML) also delivered beat-and-raise quarters, although International Business Machines Corp (NYSE:IBM) shares slumped 25% ahead of tonight’s earnings report after it said clients had shifted their buying patterns to AI-related servers and memory.

S&P 500 earnings for the quarter are tracking 23% year-on-year growth but Bank of America sees this rate rising to 28% as the results season progresses.

First-quarter earnings growth was already the strongest in four years at 27%, which was driven by healthy levels of economic activity, continued AI-related investment and an improving earnings story in some more cyclical areas.

UBS noted that the median S&P 500 company posted EPS growth of nearly 15% in the first three months of the year, which was the best growth rate since 2021.

The bank said the broadening of performance was helped by a pick-up in manufacturing activity, while fiscal stimulus shielded consumer spending from elevated energy prices over the spring.

A key source of earnings acceleration remains AI infrastructure, which UBS expects to account for more than 40% of the growth in second-quarter profits.

It said: “Demand for compute continues to exceed available supply, while constraints in semiconductors, memory, power and related infrastructure are unlikely to ease quickly. That should support the earnings outlook for AI and technology companies.”

For the Philadelphia Semiconductor index, earnings growth of 92% is forecast this year and 40% next year.

However, a clear risk to Wall Street’s rally is if AI capital expenditure or monetisation disappoints. UBS expects spending to rise 70% this year and a further 20% next year but that visibility beyond that is more limited.

And with hyperscalers’ capital expenditure already expected to exceed operating cash flow in the second half of this year, the bank views 2028 as a potential “digestion” period.

• Which fund managers actually outperform the S&P 500?
• Where to invest in Q3 2026? Four experts have their say
• Ian Cowie: the investment trusts doing a roaring trade

Microsoft shares have fallen by 17% this year as investors have become more attuned to these risks, although they have bounced by 13% since the end of June.

Deutsche Bank said this week that its conversations suggested the bear case was focused on three main factors, including fears over the impact of rising component prices on forecasts for capital expenditure, margins and free cash flow.

It also noted persistent doubts about underlying returns on ballooning investments the company is making across its AI portfolio and its concentrated backlog exposure to OpenAI.

The bank said: “While all valid concerns, we believe fears around each of these areas have become overblown and are more than fully reflected in shares now trading at 20 times forward earnings versus the 29 times three-year and five-year trailing average.”

It said this presented an attractive entry point for a company it believes is poised to continue compounding earnings per share growth at a mid-teens-plus rate for at least the next several years. The bank has a price target of $550, representing an upside of 38%.

Wall Street currently expects the Magnificent Seven, which includes Tesla Inc (NASDAQ:TSLA) figures after tonight’s closing bell, to deliver 31.1% year-on-year earnings growth.

However, the other 493 companies are not far behind at 22.8%, which financial data firm FactSet said would mark the highest rate reported by this group since the fourth quarter of 2021.

In fact, four of the five top contributors to earnings growth for the S&P 500 in the second quarter are not Mag7 companies: Micron Technology, Chevron Corp (NYSE:CVX), Exxon Mobil Corp (NYSE:XOM) and Broadcom Inc (NASDAQ:AVGO).

By the fourth quarter, Wall Street expects that the other 493 companies will report higher (year-over-year) earnings growth than the Mag7.

UBS added: “In our view, the next stage of the market cycle is unlikely to be defined by a single source of return, but by a wider group of companies and regions delivering earnings growth.

“And we note that recently, cyclical sectors - such as financials - and defensive laggards like healthcare have outperformed tech.”

• Don't miss these key summer investing events
• Sign up to our free newsletter for investment ideas, latest news and award-winning analysis
• DIY Investor Diary: shifting from 25 holdings to 50

Interest rate hikes by the Federal Reserve are not UBS’s base case, although it acknowledges the risk of a pivot by the central bank if inflation readings do not continue to improve.

It said: “This could lead to some equity market volatility and bears watching. But even in a hiking scenario, we would not expect rate increases to be large or sustained enough to derail the bull market.”