"The Roaring Twenties" Redux? Bigger rotation trades may be on the horizon!

Despite investors' focus on the rotation from large-cap stocks to small-cap stocks recently, UBS points out that a larger rotation trade may be on the horizon, which investors should pay attention to. According to a report released by the bank on Monday, a rotation from cash and bonds to stocks could potentially drive the S&P 500 index up by 17% by the end of this year. With over $6 trillion currently in money market funds, if the Federal Reserve cuts rates later this year, investors may reallocate these funds back into the stock market. Money market funds currently have an annualized yield of about 5%, but this rate is expected to decline rapidly after the Fed rate cut, which is anticipated to occur in September. UBS states that the rotation from cash to stocks is a more enduring rotation that investors should focus on. While the recent rise in small-cap stocks has attracted investors' attention, if economic growth slows down, or if the Fed rate cut is less than expected, this rotation may quickly fade. Jason Draho, UBS's head of asset allocation, commented on the recent surge in small-cap stocks, saying, "There is a delicate balance between macroeconomic data and the ideal conditions for rotation trades to continue." The report highlights many factors favoring the rotation from cash and bonds to stocks. Draho said, "We still recommend investors prepare for lower rates, seek quality growth stocks, and seize the opportunities in artificial intelligence." Draho added, "With ongoing anti-inflation measures, robust economic growth, and productivity gains from artificial intelligence technology, economic data could show strong growth, which is certainly a plausible scenario, and could lead to a 'roaring 20s' outcome, a possibility we believe is increasingly likely." The report states that while this scenario will help boost all stocks, it will be even better for certain sectors of the market. Draho said, "While this scenario is definitely favorable for small-cap and cyclical stocks, it is even better for tech and growth stocks, much like the late 1990s." Draho reiterated his year-end target of 5900 points for the S&P 500 index, but he mentioned that a bull market scenario where the S&P 500 index reaches 6500 points by the end of this year is still possible. He said, "The perfect anti-inflation scenario tends towards a bull market situation of 6500 points. In this case, there will be a rotation trade from cash and bonds to stocks."