UBS: S&P 500 Valuations Have Priced In Most of the Rate Hike Impact, Further Upside More Likely
nashnova research
The US 10-year Treasury yield has risen roughly 100 basis points year-to-date, compressing the S&P 500 forward P/E by 17%; UBS says the squeeze is near historical limits and, if the Fed hikes at a moderate pace, equities are more likely to grind higher.
How far have S&P 500 valuations fallen — and is it enough?
The S&P 500 forward P/E has dropped 17% since last November, approaching the 20%+ compressions typically seen during recessions or slowdowns.
This means → the market has already priced in most of the rate shock; room for further multiple compression is narrowing.
In plain terms = the "froth" in stock prices has largely been squeezed out by higher rates — the next leg of pressure is unlikely to hit as hard as the last few months.
Why have rates risen so sharply?
The 10-year Treasury yield has climbed roughly 100 bps year-to-date, with about 50 bps of that in the past month alone.
The main driver is a wholesale shift in expectations: last autumn the market priced in Fed rate cuts; now it prices in more hikes — the 1-year-forward 1-year rate has risen about 180 bps since late last year.
This reflects a repricing of inflation persistence, not a pure panic sell-off.
What is UBS's outlook?
UBS expects the Fed's hiking path to remain relatively moderate, assuming inflation and employment stay under control.
Inflation expectations are elevated but still within a manageable range — not yet triggering a more aggressive tightening stance.
This means → as long as the Fed avoids a rapid-fire hiking cycle, equities — whose valuations have already compressed — are more likely to recover than fall further.
What does history say?
One year after a sharp rate rise, the S&P 500 has averaged a 10% rebound.
When the Fed raises rates by no more than 1 percentage point within a year, the average rebound reaches 18%.
In plain terms = rate hikes themselves are not the threat — the speed is. A moderate pace, historically, has favored the bulls.
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