UBS strategists warn that global stocks may revisit early-2025 lows before recovering modestly by year-end. Their baseline calls for the MSCI AC World Index to finish 2025 around 830—about 5% above today’s levels—but the journey could be bumpy.
Near-Term Risks to Watch
Overoptimistic Revenue Forecasts: Companies may struggle to meet lofty top-line targets if trade and supply-chain shocks bite.
Tighter Financial Conditions: Elevated credit spreads and high U.S. P/E multiples leave little room for further multiple expansion.
Earnings Downgrades: Each 1% drop in global GDP typically trims global EPS by ~8%, with the U.S. (60% of global profits) particularly exposed.
“China Dumping”: A surge in exports from Beijing could flood markets and pressure margins across cyclical sectors.
Valuation Landscape
UBS notes the current equity risk premium of 4.9% offers no valuation cushion. Cyclical stocks remain rich versus defensives—a precarious setup since sustained rallies usually require cyclical leadership.
? Compare today’s sector valuations to historical norms via the? Sector PE Ratio Market Overview APIfrom Financial Modeling Prep.
Scenarios for MSCI AC World
H3: Base Case – 10% Tariff, 60% on China
Year-End Target: 830 (5% upside)
Fed Funds: Projected at 3.4% by December, as “well-behaved” wage growth and stable inflation allow a proactive Fed in 2H 2025.
H3: Worst-Case – Tariffs Unchanged
Temporary Dip: MSCI AC World could fall to 680 (–14%) before a late-year recovery if policy eases.
S&P 500: Could test 4,500 under this scenario.
H3: Blue-Sky – Tariff Rollbacks
Optimistic Upside: Index rises to 910 (15% upside) on broad sentiment lift, tighter credit spreads, and reaffirmed growth “exceptionalism.”
UBS assigns only a 25% probability to a full-blown bear market, citing likely fiscal stimulus in China and Europe to backstop a global recession.
What Investors Can Do
Position for Volatility: Expect near-term downside; use dips to add selective cyclicals at richer entry points.
Monitor Policy Signals: Track U.S.–China trade talks and central bank commentary for shifts that could break the stalemate.
Adjust Risk Premia: Stay aware of elevated credit spreads and P/E multiples—consider defensive sectors if spreads widen further.
