In that case — one of four outlined by the bank — the country could lose at least 265,000 jobs and suffer a 0.3 percentage point hit to gross domestic product. The S&P 500 would remain depressed before rebounding slightly to end 2023 near 3,700.
This figure is well below the 3,800 to 4,200 levels at which the benchmark has been stuck all year. The gauge was testing the upper end of that range on Friday amid optimism that debt ceiling talks were making progress. In the bank’s most bearish scenario, the S&P would end the year near the recession lows predicted by strategists, between 3,400 and 3,500 points.
However, a default is not in the bank’s base case. The US will most likely raise the debt ceiling with minimal fiscal drag in the near term, the strategists wrote in a note on Friday. The team’s year-end target for the S&P 500 Index is 3,900, below analysts’ average year-end target of 4,017. The odds of exceeding date X—the point at which the US government loses its ability to meet all of its obligations—are one in four.
Although fears of a debt-ceiling standoff have spiked options volatility and disrupted the short end of the Treasury curve, stocks have remained largely unperturbed. The S&P 500 is set for its best week since late March, and implied volatility levels for a Citigroup basket of companies whose sales are most dependent on the government have fallen since the start of the year. On Friday morning, House Speaker Kevin McCarthy indicated that both sides of the government could come to an agreement this weekend to avoid a catastrophic US default.
The worst case scenario proposed by UBS would be marked by a prolonged delay of one month in all US payments. That would reduce GDP by an additional 0.8 percentage point, add the loss of 700,000 jobs, and cause an “immediate” 30% drop in stocks, though they stress that this scenario is “highly unlikely.”
“At the moment, we see a reasonable chance, approximately 50%, that Congress will pass an extension in the short term. However, since both parties ruled out that possibility, our assessment could be seriously off,” the strategists said.