UBS Securities Canada Inc. is raising its target level for the S&P/TSX composite index to 15,000 from 13,750, saying that the index is likely to stay expensive.

“The recent surge has brought the TSX to a not insignificant 7% above our current fair value estimate,” UBS notes in a new report. “But the triad of factors that are propelling it higher look likely to continue; in particular, the large gap between earnings yields and real bond yields that should spur even more buy-outs, corporates that are flush with cash, and high resource prices that attract foreign investors.”

UBS says that real bond yields do not look primed to jump given a still fragile U.S. housing sector. Also, UBS’s global economic outlook would not seem to be pointing to a sizable decline in commodity prices or earnings overall. “Thus, it looks more likely that earnings yields will fall,” it says, noting that price-earnings ratios have tended to expand when earnings slow.

“This means that stocks are likely to become more ‘expensive’. Accordingly, we are raising our TSX target to 15,000, about 9% above our estimate of fair value in one year’s time, which itself assumes stable bond yields and 5% earnings growth,” it says. “While assuming higher valuations is risky, it is also true that 10%-15% premiums have occurred when the earnings yield gap has been as wide previously.”