S&P 500 target of 8,100 from UBS puts bank earnings to the test

A bullish call heading into a tough week for banks

UBS Global Wealth Management has set a year-end target of 8,100 for the S&P 500, which puts it at the top of Wall Street's forecasts. The call arrives just before the big U.S. banks report third-quarter results. Those reports will show whether the profit growth the forecast relies on is reaching the financial sector, which has had a hard autumn.

In September, Reuters listed HSBC and UBS Global Wealth Management among the firms that had raised their index targets above 8,000.5 An updated survey in early October still showed 8,100 as the most bullish figure. Five houses shared it: UBS Global Research, UBS Global Wealth Management, Oppenheimer Asset Management, Citigroup and HSBC.12 UBS Global Research and UBS Global Wealth Management are separate, independent divisions of UBS Group. That means two separate teams within one firm came to the same number.57

UBS has also extended the forecast. In a mid-September note, the wealth unit said it had no reason to change its view of 8,100 at year-end and 8,400 by June 2027. From the previous close of 7,619.98, those targets implied gains of about 6% and 10%.4 The 8,400 figure is higher than the bank's June house view, which pointed to 8,200 by mid-2027.6 UBS repeated the 8,400 forecast in a note after the S&P 500 rose 0.6% on Tuesday, October 6, to its first record close since August. That left the index up about 14% for the year.8

The case rests on earnings, not valuations

UBS is clear that this is a bet on earnings. It expects S&P 500 earnings to grow 25% in 2026 and 14% in 2027.49 The bank argues that rising 10-year Treasury yields, up from 4.2% at the start of the year to about 5%, have already cut the index's valuation from roughly 22 times earnings to about 19.5 times. In its view, most of the valuation damage from Fed tightening may already have happened.4

History is the other support. UBS looked at 16 Fed hiking cycles since 1954 and found the S&P 500 gained an average of 10.8% in the year after the first hike. The 2022 cycle was the weakest, with a 9% decline.49 The bank's reasoning is that the Fed usually starts raising rates when growth is strong, and those same conditions tend to support corporate profits.4

AI spending is still central to the thesis. UBS expects global AI-related capital spending to rise by more than a third, to $1.2 trillion, in 2027.8 What sets the October note apart from a pure tech call is the expectation that profit growth will spread to other sectors. UBS named financials, along with consumer discretionary and industrials, as likely beneficiaries. It said busy capital markets and a pickup in lending should help financials.8

Other forecasters agree on the direction but not the size of the move. Barclays is at 7,950. RBC Capital Markets and Stifel are at 7,900. Seaport is at 7,800 and Evercore ISI at 7,750.2 Even the most cautious major forecaster has moved up: BofA Global Research raised its year-end target to 7,400 from 7,100 earlier in the season. BofA still described its 12-month target of 7,800 as "nothing to write home about."47 BofA is actually more optimistic than UBS on earnings this year. It forecasts 33% growth to $365 a share.4 So the difference between the two banks is mostly about what investors will pay for those earnings, not the earnings themselves.

Bank stocks have not followed the rally

Bank shares tell a different story. The KBW Bank Index fell 6% in the third quarter, its worst quarter since early 2023, when regional lenders were in crisis. It is now about 13% below its August closing high.18 JPMorgan, the sector bellwether, fell about 11% from its all-time high of $366.50 on August 13 to a low of $325.87 on October 1.20

The main cause is higher yields. Treasury yields at multi-decade highs have weighed on bank shares, and fixed-income trading has slowed with them.18 Estimates put combined fixed-income markets revenue at the five largest U.S. banks just above $19 billion this quarter, down from more than $21 billion in the second quarter. That would be the lowest quarter of the year.18 Higher rates also slowed capital markets late in the quarter, and the surge in bond yields led some companies to cancel IPOs in late September.14

This is the gap UBS's financials call has to close. The S&P 500 hit a record while bank stocks fell into a correction. If profit growth is really spreading, as UBS argues, bank earnings should show it.

Profits are expected to rise, but unevenly

Analysts are not predicting a bad quarter for bank profits. They expect the largest U.S. banks' third-quarter earnings to rise as much as 20% from a year earlier, with investment banking and trading revenue well up and no sign yet of credit problems.1418 Consensus estimates compiled by Reuters show earnings per share rising year on year at all five major banks[19]:

• JPMorgan: $5.94, versus $5.07 a year earlier
• Citigroup: $2.41, versus $2.24
• Wells Fargo: $1.85, versus $1.66
• Bank of America: $1.10, versus $1.06
• Goldman Sachs: $12.44, versus $12.25

The estimates differ by source. One preview puts JPMorgan's consensus at $5.82 to $5.84 and Goldman's at $16.00 to $16.40, well above the Reuters figure.12 Another, based on Google Finance data, has JPMorgan at $5.91 on about $51.15 billion of revenue.20 Visible Alpha expects JPMorgan to lead its peers, with 9.6% revenue growth and 12.5% net income growth. It sees Citigroup's net interest margin falling even as its net interest income grows 11%, and Wells Fargo facing a lower margin with weaker 5.5% growth in net interest income.13 Read together, the forecasts point to rising sector profits with wide gaps between individual banks.

The banks' own guidance shows the same split. JPMorgan Co-President Doug Petno said investment banking fees and trading revenue should rise by a "mid-to-high teens" percentage.15 Bank of America expects its investment banking fees to fall at least 10% and sales and trading revenue to be flat.14 Goldman CEO David Solomon told investors to expect a muted quarter, with fixed income softer than equities.19 Equity trading looks like the strongest area. Banks are expected to bring in nearly $19 billion from stock trading, led by Goldman at about $5.1 billion, Morgan Stanley at $4.9 billion and JPMorgan at $4.5 billion.1618 Analysts say the first-half environment in which every bank did well is over.18

What to watch, and our view

The timing makes things harder. JPMorgan, Goldman Sachs, Citigroup and Wells Fargo report on Tuesday, October 13. Bank of America and Morgan Stanley follow on October 14, the same morning as the September CPI report.1217 A high inflation reading could push bank stocks around on rate expectations, whatever their results show.17 Fed minutes released this week showed most officials see another hike as likely by year-end.8 Options traders were pricing a move of about ±4.4% in JPMorgan shares on results day, larger than its 10-year average.20

The numbers that will matter most are provisions, deposit costs and net interest income. Analysts describe provisions as returning to normal from low levels.13 A larger reserve build would change the conversation from earnings upside to credit worsening late in the cycle.20 Some analysts have started to ask whether banks with big retail businesses will hold up better than those that rely more on investment banking.18

Our view is that UBS's 8,100 target depends less on bank earnings than on AI spending. Still, its claim that profit growth is spreading can be tested next week. Banks will almost certainly report higher profits. The real test is whether the results are strong enough, and spread widely enough, to end the sector's slump while the S&P 500 sets records. Given the split guidance and weak fixed-income trading, we expect a mixed result. Banks heavy in equity trading and big universal banks like JPMorgan should clear the bar. Firms that depend on deal fees and bond trading probably will not. If that happens, the financials part of UBS's argument will be only partly confirmed, and the bull case will depend on AI even more than it does now. UBS has said a loss of confidence in AI is among the main risks to its outlook.6