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Why S&P 500 has more room to run amid COVID-19: UBS

David Lefkowitz of UBS Global Wealth Management joins Yahoo Finance's Kristin Myers to discuss his outlook on the markets, after raising his June 2021 S&P 500 price target to 3,500.

Video Transcript

KRISTIN MYERS: Well, we're going to chat more about the market moves that we are seeing, especially after the news that we got over the weekend about this executive action from the president. So for more on this, we're joined now by David Lefkowitz, Head of Equities for the Americas at UBS Global Wealth Management.

So David, I want to start on what we're seeing right now on these unilateral moves from the president. Stimulus news have essentially been, you know, see-sawing markets last week. How do you think that any sort of tug of war that we might see coming in the next couple of days between Congress and the president is going to be impacting the markets?

DAVID LEFKOWITZ: Yeah, I mean, this is a crucial aspect that markets are focused on. I mean, it's clear the economy needs more support. I mean, we still have an unemployment rate that's 10%. And a good part of the rebound we've seen in a lot of economic data is due to the fiscal stimulus that has been deployed so far.

And if we don't have additional fiscal stimulus, I think we have a risk of seeing some backsliding there in terms of the economic gain. So it's crucial that the economy get some more support.

I think it's encouraging that both parties, both sides of the these negotiations generally acknowledge that more support is needed. But the two parties are debating about the size and the priorities of that spending. So we're hopeful that they can come to some compromise.

And you know, the market reaction today has been fairly muted relative to the failed negotiations, and I think because most investors think some common ground will be found. But obviously, that is crucial. And we have to see that in the days and weeks ahead.

KRISTIN MYERS: Do you view the president's moves as perhaps a sort of safety net or backstop for the markets right now? You know, even if the stimulus negotiations continue to drag on, we still have the president's moves. And even if those get swept away, it's because Congress has come up with some sort of deal that the markets can latch onto as positive news.

DAVID LEFKOWITZ: Yeah, I mean, I think it's a little bit of more negotiating tactics at this point. You know, the president's sort of saying he can do some things without Congress if Congress is not willing to agree with some of the administration's priorities.

And that being said, his actions are somewhat limited. And Congress has the power of the purse, and they really are the only ones that can deploy the financial firepower that this economy still needs. So it's really crucial that we do see agreement between the president and congressional Democrats.

KRISTIN MYERS: So as you mentioned, you know, markets today, the reaction fairly muted. But I want to look specifically at the S&P 500. They are up right now. You guys actually raised the target for the S&P 500 to 3,500. Right now, that level is at 3,357, just over 3,357.

What is going to push the S&P 500 higher, do you think, going forward? Is it all on a vaccine? What is the tailwind there?

DAVID LEFKOWITZ: Yeah, so I think markets have priced in a good deal of normalization. But I would say markets are not quite yet pricing in a full normalization of activity.

And I think one of the hurdles that we still have to overcome is success on a vaccine. We're pretty encouraged. We now have five different vaccine candidates that are entering phase 3 trials, and it's reasonable to assume that we should get some news from those trials before the end of the year, possibly as early as October or November.

And I think once the market sees-- if that data is positive and once the market sees that there's a clear path to the economy getting back to firing on all cylinders, then I think that is going to be a crucial catalyst.

I mean, the other thing here, I think, to keep in mind is that the Fed-- you know, we were talking about Congress and the White House just before. I mean, the Fed is doing a tremendous amount as well.

The fact that interest rates remain so low and the Fed is unlikely to move rates higher anytime soon is also a key support for valuations for the market. But in terms of additional catalysts, I think it really does come down to the pandemic and the potential solution there.

KRISTIN MYERS: I want to ask you about investor portfolios right now. You say that it's time to start taking on some cyclical risk. What industries are looking good to you right now?

DAVID LEFKOWITZ: So the areas that we've been dipping our toe, so to speak, in terms of cyclicals have been a couple. First, in terms of size we like midcaps. So they're a bit more cyclical than large-cap companies. And we're starting to see the earnings outlook for midcaps is beginning to outpace that for large caps. That's a good sign and should be a key support for the call.

Within large caps, the main cyclical areas that we like right now are industrials. This is sort of a classic cyclical sector. When manufacturing activity rebounds, industrials tend to do well. And we're starting to see that in terms of some of the business sentiment, data and we think there's more to go.

And then the other cyclical area is consumer discretionary. These are companies, not only are they leveraged to some of the long-term secular trends like e-commerce and things like that, but you've got a lot of housing-related companies in there, restaurants, retail more broadly. So as the economy continues to heal, we think there is some scope for some nice performance from that sector as well.

KRISTIN MYERS: All right. David Lefkowitz, Head of Equities for the Americas at UBS Global Wealth Management. Thanks so much for joining us today.

DAVID LEFKOWITZ: Thank you, Kristin.