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UBS said there could be a big rotation from cash and bonds into equities later this year.
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Investors own more than $6 trillion in money market funds.
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UBS’s Jason Draho reiterated his bull case for the S&P 500 rising 17% by year’s end.
While investors focus on it the recent rotation from large capitalization stocks to smaller company stocks, UBS says an even bigger rotation trade is in store for investors to watch out for.
That would be the rotation from cash and bonds to stocks, according to a Monday note from the bank, and that could be possible will contribute to a 17% rally in the S&P 500 by year’s end.
Of more than $6 trillion in money market funds, investors could be forced to reinvest that money into the stock market if the Federal Reserve continues to cut interest rates later this year.
Money market funds have returned about 5% annually, but those rates would fall quickly after the Fed cut rates. expected to happen in September.
The cash-to-stocks trade is the more sustainable rotation that investors should keep an eye on, UBS said. The small-cap rally that has captured investors’ attention in recent weeks could quickly fade if economic growth slows or the Fed does not cut rates as far as expected.
“There is a fine line between good macro data and ideal conditions needed to sustain rotational trading,” Jason Draho, head of UBS’s asset allocation department, said of the recent rally in small-cap stocks.
But according to the note, much is working in favor of the potential rotation out of cash and bonds into the stock market, and this move could coincide with a 17% gain in the stock market. S&P500 at the end of the year.
“We still recommend that investors position themselves for lower interest rates, look for quality growth stocks and seize the AI opportunities,” Draho said.
With the potential for solid economic data via continued disinflation, solid economic growth, and increased productivity through AI technologies, “it is certainly a plausible scenario” that could fuel a “Roaring ’20s” outcome, which we suspect has become increasingly likely,” Draho said.
And while such a scenario would help all stocks rise, it would be even better for a select corner of the market, according to the note.
“This scenario should be good in absolute terms for small caps and cyclicals, but even better for technology, growth and momentum stocks, as was the case in the late 1990s,” Draho said.
Draho reiterated his year-end price target of 5,900 for the S&P 500, but said his bull-case scenario of an index of 6,500 by year-end is still possible.
“Flawless disinflationary growth will skew the outcome towards a 6,500 bull case. In that scenario, there will be rotational trading, but from cash and bonds to equities,” Draho said.
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