UBS sees just 6% growth potential for global equities through 2025 by Investing.com

Investing.com — UBS has set a year-end 2025 price target of 900 for , a global equity benchmark that tracks both developed and emerging markets, implying a modest 6% upside from current levels.

The investment bank outlined several key factors underlying this outlook.

1) UBS notes that the tactical indicators are only “average”. The UBS Risk Appetite Indicator shows that risk assets are performing close to economic dynamics, with US GDP growth in line at a moderate 1%.

However, soft macro data surprises are now emerging, with Atlanta Nowcast now at 3% for the third quarter.

2) According to UBS, past data suggests that stocks tend to perform well when the US Federal Reserve cuts interest rates without a sharp landing, which the bank does not expect for the US in 2025 or 2026.

Historically, after rate cuts, stocks have gained about 20% over an eight-month period. Although markets have already performed better than usual ahead of anticipated Fed tapering, UBS expects an additional increase of around 13%.

3) UBS predicts that generative AI (Gen AI) will boost productivity starting in 2028, lifting the US equity risk premium (ERP) to 4.9%.

Without this expected increase in productivity, stocks could look expensive. The team’s models suggest that Gen AI’s effect on productivity could support around 10% upside potential for stocks, driven by defensive sectors such as healthcare, utilities and technology.

4) Strategists expect limited margin tightening in 2025 as US wage growth is expected to slow to around 3%.

This could reduce pressure on margins for many companies, especially outside the top 10 US firms. Despite this, UBS remains 8% below consensus estimates for revenue growth in 2025, forecasting 5% versus a consensus of 13%.

5) The credit environment also remains a crucial factor. UBS points out that credit and equities “are linked at the hip”, noting that big changes in equity performance are often preceded by changes in credit spreads.

These spreads also play a crucial role in determining their ERP. “Otherwise, credit spreads mean they should be lower,” strategists wrote.

Moreover, they point out that default rates are currently at about half the level implied by high yield spreads, while the balance of credit upgrades to downgrades remains favorable.

While UBS sees a central case of 6% growth, the firm also points to a 25% chance for a more optimistic scenario driven by a potential market bubble. In that case, the stock could rise more than 20% if monetary conditions, particularly in the US and China, become more accommodative.

Conversely, downside risks include a 25% chance of a 10% market decline, driven by factors such as US recession risks and China’s potential drag on global growth.