UBS Projects Only 6% Upside Potential for Global Shares by 2025

UBS has projected a year-end 2025 price target of 900 for the MSCI All-Country World Equity Index, a global benchmark covering both developed and emerging markets. This forecast suggests a modest upside of 6% from current levels.

The investment bank has identified several key factors that support this outlook:

1. Middling Tactical Indicators: UBS observes that risk appetite indicators are performing only moderately. The risk appetite indicator indicates that risk assets are closely tied to economic momentum, with U.S. GDP growth expected to align with a modest 1%. However, there have been signs of soft macroeconomic data, with recent updates indicating a 3% forecast for the third quarter.

2. Effect of Interest Rate Cuts: Historically, equities have demonstrated strong performance after the U.S. Federal Reserve implements interest rate cuts without triggering a hard landing. UBS does not anticipate such an outcome for the U.S. in 2025 or 2026. After prior rate cuts, equities have typically increased by around 20% over the following eight months. Although the market has already shown stronger performance than usual in anticipation of the Fed’s cuts, UBS foresees an additional rise of approximately 13%.

3. Impact of Generative AI: UBS predicts that generative AI will enhance productivity starting in 2028, which may raise the U.S. equity risk premium to 4.9%. Without this productivity boost, equities could appear overvalued. The firm’s models suggest that generative AI could contribute to about 10% upside potential in equities, particularly benefiting defensive sectors such as healthcare, utilities, and technology.

4. Wage Growth and Margin Squeeze: The bank expects a limited margin squeeze in 2025, as U.S. wage growth is anticipated to slow to around 3%. This may relieve some of the pressure on margins for many companies, especially those outside of the largest U.S. firms. Nevertheless, UBS’s earnings growth forecast for 2025 is 5%, which is 8% below the consensus estimate of 13%.

5. Credit Environment: The credit landscape remains a crucial element in the market outlook. UBS notes the strong correlation between credit and equities, pointing out that significant changes in equity performance often precede shifts in credit spreads. Currently, spreads suggest that volatility should be lower, as default rates are about half of what high-yield spreads imply, and the ratio of credit upgrades to downgrades is positive.

While UBS projects a central scenario of a 6% upside, there is also a 25% likelihood of a more optimistic scenario driven by a potential market bubble, which could see equities rise by over 20% if monetary conditions in the U.S. and China become more accommodating. Conversely, there is a 25% chance of a downside risk, with a potential 10% decline in the market due to U.S. recession fears and China’s impact on global growth.