S&P 500 Index to tank towards a 3,400-3,700 range on escalation of Ukraine-Russia crisis – UBS

Since omicron cases spiked in December, fears of slower growth and higher inflation have weighed on equities. Tensions between Russia and Ukraine are exacerbating these concerns. Economists at UBS see three alternative paths for economies and markets.

A bull case seems hard to envisage 

“Markets are now pricing in between four and five rate hikes this year, with the first move anticipated in March. In our base case, we do not think this amount of rate hikes would derail economic growth, and we would expect the negative impact of tightening to be more than offset by continued robust earnings. Our base case for the Russia-Ukraine situation is for an eventual stabilization and easing of tensions. In this scenario, we would expect the S&P 500 to finish the year at 5,100.”

“In our bear case, fears about inflation would lead the Fed to increase rates more aggressively than markets currently expect. In this scenario, our downside target for the S&P 500 is 4,100. The situation could be complicated further if an escalation of the Ukraine-Russia crisis were to cause a commodity price shock. If this more extreme scenario – which we think is unlikely – prompted a recession, there could be further downside for equities toward a 3,400-3,700 range for the S&P 500.”

“A bull case seems hard to envisage at such a turbulent time for equity markets, but if inflation starts to retreat, markets could go back to viewing the Fed as flexible and responsive to financial conditions. In this more benign scenario, we would expect the S&P 500 to finish the year at 5,300.”