UBS reaffirms 8,900 S&P 500 end-2027 target, sees strong gains after 20% derating

UBS argues that this year's derating is due to compressed multiples, not weak earnings, which strengthens the case for buying US equities on dips through 2027. The bank's preference for semiconductors, hyperscalers and the Nasdaq 100 over the Russell 2000 shows a continued focus on large-cap AI beneficiaries, not a broad rotation. A near-term caution about positioning and technical factors points to persistent volatility through year-end. Rising oil prices are cited as a drag on valuations, connecting the equity outlook partly to energy market developments. Data center construction policy after the midterms is a new factor to monitor for the AI capex trade.

The S&P 500 has already been discounted for its concerns, and with earnings still rising, historical patterns support a bullish outlook, according to UBS.

Summary:

• UBS maintained its S&P 500 target of 8,900 for end-2027 and established an end-2028 target of 9,600.
• The bank forecasts EPS growth of 18% to $430 in 2027 and 14% to $490 in 2028, with the 8,900 level representing about 18 times 2028 earnings.
• The forward P/E ratio has declined about 20% this year even as earnings have grown around a third; historically, the index has posted a median 20% return following a P/E drop exceeding 10%.
• UBS cautioned that the near term stays volatile and positioning-driven, though it sees potential for a rebound early next year.
• Pauses in data center construction after the midterms threaten about 30% of planned 2028 US capacity additions.
• UBS prefers semiconductors, software, hyperscalers, health care and financials, and favors the Nasdaq 100 over the Russell 2000.

UBS has maintained its S&P 500 end-2027 target of 8,900, contending that this year's significant decline in valuations historically paves the way for strong returns, per a note from US equity strategist Keith Parker reported by Investing.com.

The target is earnings-based. UBS projections show S&P 500 EPS increasing 18% to $430 in 2027 and another 14% to $490 in 2028; the 8,900 level is roughly 18 times that 2028 EPS. The bank also set a 9,600 target for end-2028. Seeking Alpha reported that UBS cut its end-2026 target to 7,900, making the 2027 level about 13% higher.

Parker's key point is that valuations have already priced in much negative news. The index's forward P/E ratio has dropped about 20% this year despite earnings on pace to rise by around a third. He attributes the derating to concerns over AI spending returns and regulation, higher bond yields and credit spreads, climbing oil prices, and reduced share buybacks. Historical data supports this, he noted: after years with a P/E decline exceeding 10%, the S&P 500 has returned a median 20%.

UBS expressed caution for the near term. The bank characterized the market as very volatile and more influenced by positioning and technical factors, making its near-term goal tougher to achieve. Nonetheless, it sees increasing odds of a rebound early next year after the derating and de-risking conclude. It also anticipates more signs of accelerating AI adoption in the first half of 2027.

The primary risk the bank identifies is more distant. State-level halts in data center building after the midterm elections threaten roughly 30% of planned 2028 US capacity additions, which UBS says weighs 2028 risks to the downside. The bank intends to reassess its predictions once policy specifics come out, probably next year.

For positioning, UBS favors semiconductors over tech hardware and is overweight in software, hyperscalers, health care, and financials. It prefers the Nasdaq 100 to the Russell 2000, as well as companies with robust balance sheets.