4 reasons why the S&P 500 has another 5% upside this year, UBS says

• The ongoing S&P 500 rally could extend to 5,500 this year, UBS said.
• Disinflation, Fed rate cuts, broadening earnings growth, and continued AI investment will be the main drivers, according to the firm.

With last month's equity jitters already quashed, the ongoing rebound is the start of an extensive summer rally, UBS said.

According to a note published Tuesday, the S&P 500 could reach the firm's upside scenario of 5,500 by this year's end. That represents a gain of over 5% from current levels.

This call looked less feasible in April, when the benchmark index stumbled 4.5% peak-to-trough. Ailing the market was an onslaught of inflationary data, which fueled concern that an interest rate hike was back on the table.

"But the early weeks of May have allayed some of these fears, with 'Goldilocks' macro data so far: Wage growth continues to show signs of softening, which is positive on the inflation front, while the overall economy still appears on solid footing," Solita Marcelli, UBS' Global Wealth Management Americas CIO wrote.

Expectations of further disinflation are one of the four factors Marcelli cited for why the environment will continue to support equities through this year.

However, April's producer price index has already put up a challenge to this outlook, as the inflationary reading came in hotter-than-expected on Tuesday. But at the same time, March's print was revised lower, quelling some concern.

Second, cooling price growth will make prospects of an interest rate hike increasingly unrealistic, a boost for stocks. While many on Wall Street still hold that no rate cuts will come this year, futures markets are betting that a policy pivot will start in September.

Third, equities will continue rising on robust on broadening profit growth, Marcelli added: " First-quarter earnings season has been positive, with over 75% of companies beating estimates to date, and results supporting our view for 9% earnings growth this year."

Finally, continued investment in artificial intelligence will keep fueling upside momentum, even if the rally broadens out, the note said.

While the past 30 days have seen utilities become one of the top three sector performers, even this was buoyed by AI hype. After all, 30% of the industry is exposed to electricity demand, which tech developments have been boosting significantly.

"We expect AI spending to remain strong, and foresee a bottoming in end markets like PCs and smartphones," Marcelli wrote, noting that a rotation into cheaper segments won't offset this: "Tech earnings have been some of the strongest so far during the 1Q reporting season, with revisions in the sector outpacing the rest of the market."

That's not only exclusive to the Magnificent 7 large-caps, she added. Excluding names such as Microsoft, Nvidia, and Apple, tech profits estimates have been revised 7% higher since March.