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Global financial markets have rebounded strongly from their March lows when fears about the COVID-19 health crisis peaked. The S&P 500 index has risen more than 45% since then and has almost fully recovered to pre-pandemic levels. Economists at UBS review their three current set of scenarios, and forecast S&P 500 at 3,500 by end June 2021 in the central scenario, and at 3,700 and 2,800 in the upside and downside scenario respectively.

Key quotes

“In our central scenario, we expect no renewed nationwide lockdowns. Moderate restrictions on activity should be sufficient to keep outbreaks manageable, with a vaccine widely available from 2Q 2021. This, combined with expansionary monetary policy and a moderate increase in fiscal stimulus, should allow for a rebound of economic activity to pre-pandemic levels by 2022. Against this backdrop, and with yields anchored close to record low levels, we think that the equity risk premium can normalize to pre-pandemic levels and would project the S&P 500 to trade at 3,500 by end June 2021.”

“In our upside scenario, we think a combination of earlier-than-expected vaccine availability, increased fiscal stimulus, status quo in US-China relations, and a ‘benign’ outcome to the US presidential election would lead to equity risk premia falling below pre-pandemic levels, and we would project the S&P 500 to trade at 3,700 by end June 2021. We would also expect further dollar weakness.”

“In our downside scenario, we would expect the S&P 500 to trade at 2,800 by end June 2021. We think that gold and the Swiss franc are among the best potential hedges for this scenario.”