As investors pivot from large-cap stocks to smaller companies, UBS forecasts an even bigger rotation: from cash and bonds into stocks. This shift could drive a 17% rally in the S&P 500 by year-end, according to a recent note from the bank.
With over $6 trillion in money market funds, a potential Federal Reserve rate cut in September could prompt investors to move cash into the stock market. Current yields on money market funds are about 5%, but would drop if the Fed cuts rates, pushing investors towards stocks.
UBS highlights the durability of the cash-to-stocks trade over the small-cap rally. The latter might fade if economic growth slows or if rate cuts are less aggressive than anticipated.
Jason Draho, UBS head of asset allocation, sees favorable conditions for this rotation, predicting a 17% gain in the S&P 500. He recommends positioning for lower rates, focusing on quality growth stocks, and leveraging AI opportunities.
Draho’s year-end S&P 500 target is 5,900, with a bullish scenario reaching 6,500, driven by “immaculate disinflationary growth” and a shift from cash and bonds to stocks.