UBS, the investment bank, published an optimistic outlook this week, stating that the S&P 500 rally is far from over and the bull market is likely to continue strengthening. The bank bases its view on three key macroeconomic and sectoral factors, indicating a favorable backdrop for continued corporate earnings growth and stock valuations. UBS also forecasts roughly 10% year-over-year earnings per share (EPS) growth in the third quarter, highlighting confidence in the financial health of U.S. corporations.

Flexible Consumer Spending and Stable Labor Market
Consumer spending, the central growth engine of the U.S. economy, remains flexible and resilient. According to UBS, the labor market has shown some signs of cooling but remains stable. Data indicate low layoffs, a sustained trend of rising wages, and a healthy number of job openings. This labor market stability provides consumers with economic confidence, allowing them to continue spending, which supports both the broader economy and the profitability of publicly traded companies in the S&P 500. Consumer strength is a critical factor that reduces recession concerns and provides a cushion for demand.

Strong AI Investments and Sectoral Growth Drivers
Investments in artificial intelligence (AI) continue to be the most significant sectoral growth driver. Broad adoption of AI technologies and related spending demonstrate ongoing growth. UBS expects strong revenue growth for cloud service providers, which form the backbone of AI infrastructure. The massive investment in this field leads to upward revisions in earnings forecasts for companies related to AI infrastructure, including chip manufacturers, software firms, and network infrastructure providers. The AI trend provides a clear growth path for leading technology companies, reinforcing overall market momentum.

Supportive Policy and Resilient Earnings Growth
UBS believes that economic policy and corporate performance create a supportive backdrop for the continuation of the bull market. Expected rate cuts by the Federal Reserve (Fed) will contribute to a more favorable financing environment, encouraging investment and business expansion. Alongside monetary easing, the bank expects earnings growth to remain resilient. The upcoming earnings season for the third quarter is expected to reinforce this confidence and validate the strength of the bull market. The combination of falling interest rates and stable earnings growth is considered a classic recipe for a continued stock market rally.