Five Scenarios That Could Shape Global Markets in 2025/26 – UBS Analysis

UBS has outlined five scenarios that may influence the investment landscape for 2025/2026 in its Global Market Outlook.

The first scenario envisions former President Donald Trump returning to the presidency, with Republicans also gaining control of both houses of Congress but lacking a filibuster-proof majority in the Senate—a situation referred to as the Red Sweep. Fiscal policy for 2025 is largely predetermined, based on existing bipartisan agreements, while significant changes are expected beyond that year, particularly as many tax cuts from the Tax Cuts and Jobs Act of 2017 are set to expire at the end of 2025.

UBS analysts noted that they do not expect a straightforward extension of the Tax Cuts and Jobs Act but anticipate that most elements will be prolonged. They estimate the fiscal deficit would increase by $4.4 trillion and exceed 7% of GDP after 2028, primarily due to the costs required to maintain current policies. An additional aspect of this scenario includes a proposed corporate tax reduction that could cost approximately $600 billion over ten years, potentially funded by repealing energy tax provisions from a recent legislative package.

When summed up, the deficit could expand significantly over the budget period, with most spending aimed at sustaining the existing tax framework rather than providing substantial cuts to personal taxes. Although the corporate tax cut might stimulate some growth, the combination of this tax policy and stricter tariffs on China suggests that the widening deficit may not significantly boost overall economic growth.

The second scenario considers a possible victory for Vice President Kamala Harris, with Democrats reclaiming the House of Representatives and potentially retaining control of the Senate—a situation referred to as the Blue Sweep. Harris’ campaign has proposed raising the highest tax bracket to 39.6% for individual incomes above $400,000 and joint incomes exceeding $450,000, echoing prior proposals from the Biden administration.

This change could mitigate some of the revenue shortfall from extending tax provisions for other income groups by about $400 billion across the budget window. Overall, while there are several proposals aimed at raising revenue, policies under this scenario could widen the deficit by roughly $2 trillion over ten years. Balancing tax increases on higher incomes and corporations against tax cuts for lower-income groups, UBS estimates that economic growth would decelerate slightly in 2026 and 2027 compared to the baseline.

The third scenario anticipates a recession in the U.S. economy, a risk that may diminish if the Federal Reserve successfully implements the anticipated monetary easing. Despite positive economic indicators, signs of financial strain among households have emerged, with delinquencies on credit cards and auto loans approaching levels seen during the global financial crisis. For lower-income earners, liquidity has dwindled significantly, and high-income households might see reduced spending following the post-COVID surge.

If consumer spending decreases enough to undermine corporate confidence, it could lead to diminished hiring, resulting in a negative feedback loop of spending and saving. The Fed would likely need to lower interest rates to stimulate the economy once more.

The fourth scenario focuses on tariffs, particularly a proposal from former President Trump to impose significantly higher tariffs on China and other global markets. If realized, this could face legal delays, with expectations that the tariffs on China might not take effect until late 2025, while the tariffs on other countries might be introduced in 2026. Past literature suggests that such tariffs in 2018/2019 primarily impacted U.S. consumers rather than resulting in price reductions from Chinese firms. There would likely be increased scrutiny on regulatory compliance to avoid tariff circumvention.

Finally, the fifth scenario addresses the potential consequences of central banks easing monetary policy too soon. Nearly 70% of central banks have begun cutting interest rates, even while inflation remains stubbornly high, and a significant portion has missed their inflation targets. The rationale for cutting rates now appears to be preventative, aiming to stave off a deeper slowdown. However, it is unusual for markets to expect such significant cuts while labor markets remain tight, raising concerns that premature easing could slow the economic recovery.

In conclusion, global growth outside the eurozone and China has been holding above long-term averages. If the U.S. economy does not slow as anticipated, and with any potential recovery in eurozone consumption or further stimulus from China, global economic momentum may significantly increase, driving growth beyond expected trends.