UBS Group expects the US stock market to hit a new high in 2025. In a report released to clients on Tuesday, the bank's strategist Jonathan Golub raised the target price for the s&p 500 index in 2025 from 6000 points to 6400 points. The new forecast implies a 9.2% increase from Monday's closing price.

Golub pointed out that a favorable economic backdrop is the catalyst for this change. "UBS economists expect the US nominal GDP to grow by 3.7% in 2025, roughly in line with the long-term average level," he said. In addition, "rate cuts should reduce interest expenses and default risks, thereby increasing earnings per share and valuations."

Golub's call comes a day after the s&p 500 index hit a historical high, with the index up nearly 23% year-to-date. Due to investors anticipating further rate cuts from the Federal Reserve in the coming months, the stock market has been on a strong upward trend recently.

"In a non-recessionary environment, when the Fed cuts rates, US stock valuations typically rise," the strategist said. "Despite high valuations, we expect the pe ratio to increase."

Golub also pointed out, "A significant decrease in the federal funds rate could increase profit margins by 20 basis points through lower interest expenses."

CME Group's FedWatch Tool shows that traders expect the Fed to cut rates by 25 basis points in November and further cut by 25 basis points in December.

In September, the Fed cut the benchmark federal funds rate by 50 basis points to a range of 4.75% to 5.0%.

It is certain that Golub does not believe that the US stocks will continue to rise for the remainder of this year. Although he has raised the expected value of the benchmark index for 2024 from 5600 points to 5850 points, this actually means the index will slightly decline from the current level.

According to UBS Group's outlook, US stocks may consolidate before reaching new highs next year by the end of 2024. The bank stated, "Despite estimates on Wall Street (and our own models) attempting to reflect more normal growth levels in a better background of discretionary consumer spending, the timing of this recovery remains uncertain."