Vaccine hopes not fully priced into S&P, 15% upside in equity - UBS

• The prospects of a vaccine with efficacy of more than 90% with the White House and Senate split on party lines is giving UBS a lot of reasons that 2021 will match its optimistic scenario.

In its most optimistic view, UBS sees the S&P (NYSEARCA:SPY) -1.3% rallying to 4,100 in 2022, a 15% upside from current levels.

Among the reasons for equities upside after vaccine and election news strategist Keith Parker points to are:

• Vaccine hopes were 77% priced into the S&P, but stocks aren’t pricing in a backdrop of real rates at -0.8% and GDP growth “well above” 3% through 2022.
• Future quarters earnings estimates have not moved on Q3 beats and “broad upgrades” should come over the coming months.
• An effective vaccine would point to big upside, as political gridlock without recessions have seen the S&P return 26% to 30%, although stimulus would be needed near term.

• Rates volatility “has stayed low as rates have risen implying rates should settle down soon”, helping forward P/E.
• Lower policy uncertainty under a Biden administration could be a 3-6% boost to P/Es.

What sectors will perform well:

• There is a 7 percentage points of potential further outperformance for small-caps (NYSEARCA:IWM) -2.3% with a vaccine.
• “We would not give up on Growth as rates likely settle down and instead would further (underweight) Defensives on the prospect of a faster recovery.”
• UBS picks energy, financials, builders and durables over airlines, leisure, machinery and chemicals.

Debt levels “have surged for most of the hardest hit industries such as Airlines such that the upside for those levered stocks may be less than hoped, and further FCF weakness could further dilute equity holders," Parker says. “Thus, we would be mindful of chasing indiscriminately and would look for stocks that have not had a debt surge and thus better risk-adj equity upside”.

https://seekingalpha.com/news/3635680-vaccine-hopes-not-fully-priced-s-and-p-15-upside-ubs