Part of the deal

In January, President Trump told Russia to end the Ukraine invasion or face sanctions. “We can do it the easy way or the hard way,” he wrote. On the campaign trail, he also promised to end the war in one day.

That has not proved possible, and Trump’s actions have since included opening direct negotiations with Russia and blaming Ukraine for starting the war. But, despite heated personal rhetoric between President Trump and President Zelenskiy, at the time of writing, the Financial Times reports that the US and Ukraine have agreed terms on a deal to jointly develop Ukraine’s state-owned mineral resources.

We believe that extracting financial concessions from Ukraine (or Europe) in exchange for US support is indicative of a US administration trying to reach an agreement that allows Trump to claim that the US is no longer being “taken advantage of.” We believe this is Trump’s preference rather than withdrawing support for Ukraine and European security entirely.

Our base case is that a ceasefire can be reached over the course of this year. This would likely involve Ukraine losing some territory, but gaining Western (if not necessarily US) security guarantees and reconstruction commitments. Russia may negotiate sanctions relief and a partial resumption of gas flows to Europe (even if they are unlikely to return to pre-war levels).

Such a deal could provide some modest benefits to the European economy from lower energy prices, and improving consumer and business sentiment. But it is also likely to incur fiscal costs. For example, defense spending may rise beyond the previously agreed NATO requirement of 2% of GDP. We estimate that lifting the defense spending of 21 European countries to at least 3% of GDP would require additional government revenues of a combined EUR 230bn (compared with an additional EUR 75bn to reach the 2% level).

For investors, a lasting ceasefire agreement could represent a positive catalyst for European equities. In particular, building materials and industrial companies would likely be among the beneficiaries of reconstruction efforts. In bonds, sovereign spreads of countries most exposed to an escalation with Russia could see some tightening on the back of a deal. A ceasefire could also support investor sentiment toward the euro. Finally, we expect select defense stocks to benefit from rising security investments.

Figure 2: Ukraine’s reconstruction could create positive catalysts for European equities

Estimated costs for Ukraine’s reconstruction and modernization in the next decade, in USDbn

Total estimated costs: USD 486 billion (2024-2033)

Of course, getting Ukraine, Europe, and Russia to agree—a prerequisite to a ceasefire—is not going to be simple. This suggests that an imminent halt to the conflict is unlikely. And, given the recent strong performance from a variety of European assets, in part due to optimism about a potential near-term ceasefire, we would recommend preparing for such outcomes through structured strategies if possible, rather than via outright positions.

Promises made by President Trump on the campaign trail included undertaking the “largest regulatory reduction in the history of our country,” “massively cut taxes for workers and small businesses,” and “rip the waste out of our great nation’s budget,” as well as measures to tackle undocumented immigration.

Whether these policies are right or wrong for the country probably depends on your political persuasion. Whether they’re right or wrong for markets will likely depend on whether hopes about deregulation and tax cuts can offset fears about the potential effects of tougher migration policy, higher tariffs, and government spending cuts.

At this stage, we would make two observations: (1) The direct impact of measures announced so far is not large enough to have a meaningful direct impact on growth, inflation, or the deficit (or on stated policy objectives), in our view. (2) Second-order effects and hasty policy execution pose downside risks to growth and upside risks to inflation.

Take government spending cuts, for instance. Through various measures, the number of federal workers may drop by several percent, but this represents only around 0.1% of economy-wide payrolls, suggesting a limited impact on overall employment, GDP, or government spending.

Yet, anecdotal evidence points to potential adverse impacts from the expediency of the program. For example, news reports highlight erroneous decisions to lose staff involved with preventing the spread of avian flu or even operating the US nuclear deterrent.

Meanwhile, stricter border security and hostile rhetoric may slow immigration and stall labor supply growth. With the economy at full employment, reduced labor supply risks pushing up wages and potentially driving inflation.

Tax measures may also not provide as meaningful a boost to growth as hoped for. An extension to the TCJA (Tax Cuts and Jobs Act) would prevent an increase in taxes, but is not stimulative in itself, and House Freedom Caucus defections risk imperiling even this. Significant new personal or business tax cuts also look unlikely to pass Congress, in our view. At the time of writing, the House of Representatives has passed a budget resolution bill, but this does nothing more than defer the hard decisions on tax cuts and spending.

Finally, a highly partisan political environment increases political event risks associated with the budget and debt ceiling. In the near term, a government shutdown in mid-March looms if (as seems likely) a bipartisan deal on funding cannot be reached, and the summer could usher in yet another prolonged impasse over the debt ceiling.

Generally, we would expect the economy to bounce back quickly once funding is restored, since most government workers will still get paid (albeit late). The longest previous shutdown was 35 days during the first Trump administration, which hit first-quarter 2019 growth by 0.2%, according to Congressional Budget Office estimates.

For investors, we believe this speaks in favor of staying invested, but we also advise considering hedging approaches for US risk assets, particularly as we head into a potential government shutdown and the 1 April deadline when federal agencies offer recommendations on future trade policy.

Since the first day in office, the Trump administration has released a steady stream of tariff threats on both products and countries. Tariffs have been proposed on Canada, Mexico, and China (though only the latter have been implemented so far, with an additional 10% now threatened). At the time of writing, President Trump has said 25% tariffs on Canada and Mexico will begin on 4 March. Meanwhile, import tariffs on steel, aluminum, and some metal products will be raised to 25% potentially starting in March.

Trump has also directed his administration to evaluate reciprocal tariffs on products from countries that impose trade barriers on US goods. Crucially, the administration considers domestic sales taxes as a non-tariff barrier to trade (even if sales taxes are usually imposed on goods regardless of their origin), potentially widening the scope and scale of reciprocal tariffs considered. Federal agencies are due to report back on 1 April.

We would expect that after 1 April, most countries will be threatened with tariffs. But we would also expect various deals to be struck to limit their overall breadth and scale.

Figure 3: India, Thailand, Mexico, and China look most vulnerable to reciprocal tariffs

Weighted average tariffs from US on exports and on US imports in 2022, including tariff differential, in %

Some countries do appear willing to make concessions to avoid US tariffs. For example, we note that the EU has preemptively offered to cut tariffs on US cars as part of a deal that includes increased LNG and defense purchases. Additionally, following a meeting with India’s prime minister, Trump said the two countries would seek to reduce “very high” Indian tariffs on US goods and strike deals for the purchase of US oil, gas, and combat aircraft. Canada and Mexico also demonstrated a willingness to negotiate following tariff threats in January, and we would also ultimately expect “deals” with Canada and Mexico to prevent the sustained and broad introduction of tariffs on the US’s neighbors.

We also believe that President Trump will be willing to seek “deals,” particularly if US economic activity is potentially at risk from failure to agree, and if counterparties show a willingness to offer concessions. The action on tariffs thus far shows how threats can be escalated only to be subsequently deescalated.

In our base case, we would expect tariffs on China increase to an average effective rate of 30% by the second half of 2025. We also expect select tariffs on Europe and some efforts to limit transshipments. But we do not expect large, broad, and sustained tariffs on Canada or Mexico. Such a tariff outcome would not have a large direct impact on US growth or inflation, in our view.

However, like with domestic policy, while direct impacts may be limited, investors will need to monitor the risk that indirect effects could begin to mount. For example, repeated threats of higher tariffs on key trading partners and a lack of policy visibility could weigh on business investment and hiring even if the tariffs are never imposed. US companies may also suffer if heated rhetoric promotes “buying local” or boycotting US goods, if there is a comparable alternative or substitute.

Our base case macro scenario is for “growth despite tariffs.” While US economic growth is likely to moderate compared with last year, we still expect GDP to expand at around 2% in 2025. We also still expect two 25-basis-point rate cuts from the Federal Reserve this year, in June and September, as inflation gradually cools. In this scenario, we would expect the 10-year Treasury yield to fall to 4.0% by year-end, and US equities to rally by around 10%.

An upside scenario could see US growth stay around 2.5% while inflation stays in the 2-3% range, with positive policy surprises and continued optimism about artificial intelligence proving additionally supportive for equity markets. In this case, we would expect the 10-year Treasury yield to rise to 5.25%, and US equities to rally by around 18%.

We consider two bear case scenarios:

In a “tariff shock” scenario—in which trade policy proves overly aggressive and includes broad and sustained tariffs on Canada and Mexico—we would expect both equity and bond markets to sell off as growth forecasts are revised down and inflation forecasts are pushed up. In this case, the Fed and other global central banks would likely consider delaying further rate cuts to manage inflation expectations, and risk premia would likely rise. We would expect the 10-year Treasury yield to rise to 5.0%, and US equities to fall by around 15%.

In a “hard landing” scenario—in which the US economy falters as consumer spending slows sharply—we would expect both growth and inflation to fall, and interest rates to be cut rapidly as central banks attempt to support demand. In such a scenario, we would expect the 10-year Treasury yield to fall to 2.5%, and global equities to decline by around 25%.

The US economy is still in good shape. The Atlanta Fed’s GDP tracker suggests growth of 2.3% in the first quarter, and unemployment remains low. The net direct effect of policy measures announced so far is likely to be limited. But the indirect effects and rising event risks, which are more difficult to quantify, could start to accumulate.

The sequencing of policy also carries risks. Thus far, policy has focused on tariffs, immigration, and government spending cuts, with potentially adverse effects on growth and inflation, while there has yet to be an offset from tax cuts or deregulation.

To navigate the months ahead, we recommend being invested in stocks, with a focus on the US, AI, and power and resources. Given rising uncertainty, investors should consider hedging equity exposures to manage negative event risks, and ensure portfolios are well-diversified with assets including quality bonds, gold, and alternatives.

Equities

We currently see the best risk-reward in US equities, AI, power and resources, and German equities. In each case, we believe that structured strategies can help investors navigate potential near-term market volatility—for example, by hedging some of the risks around a potential US government shutdown in March, disappointments in Russia-Ukraine negotiations, or around tariff policy.

We rate the US market as Attractive owing to its relatively strong earnings growth (we forecast 8% for S&P 500 companies this year) and high exposure to AI. In our base case, we expect the index to rally to 6,600 by December.

Figure 4: Big tech companies’ capex plans remain solid

Big 4’s capex, in USD bn, including UBS forecasts

We keep a Neutral view on Eurozone equities overall given the region’s relatively modest earnings growth outlook, lower AI exposure, and ongoing tariff risks. At the same time, we note that a pro-growth shift from the German election results, or a peace deal between Russia and Ukraine that lowers gas prices, could positively influence sentiment. We recommend that investors position for potential positive catalysts in Europe via structured strategies on the German DAX index, or through individual stocks that are well positioned to benefit from these themes.

We also maintain our conviction in the AI theme globally. Big tech companies’ capex plans remain solid, and we believe the development of low-cost models like DeepSeek’s will ultimately spur greater AI adoption. We see opportunities throughout the AI value chain, especially in megacap platform and application beneficiaries, and infrastructure companies with strong pricing power.

Companies exposed to power and resources also offer long-term investment opportunities, in our view, as AI advancements, decarbonization, and economic development continue to boost electricity demand. We see opportunities across the power and resources value chain globally, including in utilities, infrastructure, power equipment, and storage.

Fixed income

We believe that yields on quality bonds are appealing and that the relatively high yields available currently help cushion the total return outlook for the asset class. In our base case, we forecast the 10-year Treasury yield reaching 4.0% by the end of 2025 as growth moderates, inflation cools, and the Fed gradually cuts policy rates.

In a portfolio context, quality bonds can also help investors manage the risk that US growth slows more quickly than expected—for example, owing to the cumulative effect of policy changes.

We also see other opportunities for seeking diverse and durable portfolio income, including through diversified fixed income strategies, senior loans, private credit, and equity income strategies.

Currencies

Volatility is likely to dominate the currency markets during the first half of the year, providing the opportunity for investors to boost portfolio income and earn additional yield in exchange for agreeing to make currency conversions at specific prices. Specifically, over the next one to three months, we look for opportunities to pick up yield by selling the exchange rate upside in EURUSD and EURAUD, and downside in USDCHF.

With a resilient US economy, the Fed is taking a patient approach to monetary policy easing as it waits for tariff policy to unfold. We expect the US dollar to remain strong in the near term, targeting the recent lows of EURUSD at 1.02, though we still see scope for a gradual reversal in the second half of the year toward 1.06 by December.

Meanwhile, we now rate the Japanese yen as Attractive. Inflation in Japan remains elevated and requires more policy normalization. The Bank of Japan is the only G10 central bank hiking rates this year and has room to raise them further, in our view, potentially beyond market expectations. Over the next six months, we like selling upside in CHFJPY and EURJPY, and downside in GBPUSD and AUDUSD.

Commodities

The gold price reached a new record high of above USD 2,950/oz in mid-February before a modest setback amid profit-taking alongside Ukraine talks. We expect tariff and geopolitical uncertainty to continue, and so stay focused on the metal’s diversification qualities within a portfolio context. Central bank demand remains crucial to our Attractive rating on gold, with net buying exceeding 1,000 metric tons for the third consecutive year in 2024 alongside broader investment demand hitting a four-year high.

Our forecast for gold to reach USD 3,000/oz this year is unchanged, albeit we acknowledge that in the risk case (i.e., downside macro scenarios) the metal could reach USD 3,100-3,200/oz. Outside gold, we see room for larger gains in silver as the gold rally consolidates and global industrial production signals a modest recovery. While silver should not be seen as a longer-term portfolio hedge, we forecast its price at USD 38/oz over 12 months.

Meanwhile, we see upside risks to crude oil prices at current levels, with discipline in OPEC+ ensuring the market stays in balance and uncertainties remaining elevated as tariffs and sanctions risks persist.