More to go in stocks

Falling rates and solid growth make the US market Attractive; we also like select markets in Asia ex-Japan, Eurozone small- and mid-caps, and Swiss high-dividend stocks.

21 Nov 2024

After strong years for equities in 2023 and 2024, we see further upside in 2025. We expect the S&P 500 to reach 6,600 by the end of 2025, around 10% higher than today’s levels. Tariffs could contribute to volatility in European and Chinese markets. But we see value in maintaining diversified exposure to Asia ex-Japan. In Europe, we like small- and mid-cap stocks and Swiss high-quality dividend payers.

We view the outlook for US equities as constructive from a macroeconomic, structural, and bottom-up perspective. The combination of resilient US growth and lower Fed rates has historically been a powerful combination for US stocks. In the past, when the Fed cut rates and the US did not enter recession, US equities rose 18% on average in the 12 months after the first Fed rate cut.

The recent earnings season demonstrates that AI capex intentions remain robust, supporting our positive outlook on US technology stocks. Earnings growth is also broadening into non-tech earnings in the US, a trend which could be further supported by US deregulation and tax cuts.

Valuations are not low in a historical context. On a 12-month forward price-to-earnings ratio basis, the S&P 500 currently trades at 22.3x versus a 20-year average of 16x. But we believe this valuation is justified by the healthy US economic backdrop and the high degree of exposure to structural growth.

The line chart shows the average performance of the S&P 500 following the first rate cut by the Fed, with and without a recession. The lines rise after the first rate cut, with the "no recession" line rising more. This suggests that rate cuts tend to support US equities if the economy doesn't enter a recession. Source: The data is sourced from Bloomberg, UBS, as of November 2024.

US: AI, tech, financials, and utilities to driver further upside

We think the US equity market looks Attractive and expect the S&P 500 to hit 6,600 by the end of 2025, around 10% higher than today’s levels.

The US economic backdrop is supportive, the market is less at risk from tariffs than other international markets, and structural trends around AI and power and resources bolster the outlook. AI-related companies that span semiconductors, cloud service providers, devices, and data centers account for over one-third of the S&P 500 by market cap. We expect around 11% S&P 500 earnings per share growth in 2024 and 8% in 2025.

Within the US, we view the technology, utilities, and financials sectors as Attractive.

Technology: AI infrastructure spending remains robust, and we expect key semiconductor components needed for AI to remain supply constrained in 2025, supporting pricing. In addition, the tech sector should benefit from an improvement in PC and smartphone end markets. The industry could face headwinds from tariffs, but we do not believe this will outweigh the structural growth story over the medium term. We see the best opportunities in AI-linked semiconductors and US megacaps.
Utilities: Although utilities companies with high renewables exposure could face near-term pressures, we also expect significant growth in AI data centers to fuel power demand, leading to higher power prices. Roughly 20-25% of the sector has material exposure to these trends. The sector’s defensive characteristics should also offer ballast to a portfolio in case economic growth concerns rise.
Financials: We expect Fed rate cuts to lead to lower funding costs, higher loan growth, and more capital market activity. Following the US election, we also expect the financial sector to benefit from deregulation.

Asia: Diverse growth opportunities

We find the Asia ex-Japan market Attractive overall, and expect the MSCI Asia ex-Japan index to return about 15% by the end of 2025.

While tariffs are likely to be a headwind for China, AI spending, high GDP growth, and declining US and regional interest rates should be supportive for other markets in the region.

We expect Asia ex-Japan to offer one of the most appealing earnings growth profiles globally, with a forecast of 13% earnings growth in USD for 2025.

Mainland China: We expect US tariffs and potential stimulus disappointments to pose risks to Chinese stocks in the months ahead. Against this backdrop, we anticipate defensive and high-yielding value sectors to outperform, like financials, utilities, energy, and telecoms. Corrections in internet names could be seen as good entry points for investors willing to hold over multiple years, due to their attractive growth prospects and valuations.
Taiwan: We see Taiwan as an Attractive market. While the market is sensitive to trade, key semiconductor exports are not readily substitutable, we expect AI demand to remain robust, and think that pricing power should lead to positive gross margin surprises in 2025.
India: We also view India’s market as Attractive. High structural rates of GDP growth are supported by favorable demographics in a domestically oriented market, and we expect 12% EPS growth in fiscal year 2025 (MSCI India) and 14% in fiscal year 2026.

The bar chart shows CIO's earnings growth forecasts for 2025 for select equity markets (MSCI indices), ranked from the highest (Asia ex-Japan: 18.4%) to the lowest (EMU: 1.9%). Other markets included are: China (9.3%), the US (8.0%), Switzerland (7.5), AC World (6.9%), Japan (5.0%) and the UK (2.2%). The chart suggests Asia ex-Japan earnings growth will lead global earnings growth in 2025. The source is UBS as of November 2024.

Europe: Focus on Eurozone small- and mid-caps and Swiss high-quality dividends

The potential for tariffs under a Trump administration is a concern for European companies, particularly European cyclicals (like consumer discretionary and industrials) exposed to China. We expect European earnings growth to be weaker than elsewhere in the world, and expect European stocks to underperform US equities.

Nevertheless, solid economic growth, lower interest rates, and reasonable valuations should offer some support. The MSCI Europe Index trades at a 12-month forward price-to-earnings ratio of 12.9x. We expect total returns of around 6% by the end of 2025.

We favor beneficiaries of falling interest rates and structural growth opportunities. Eurozone small- and mid-caps and Swiss high-quality dividends are among our preferred tactical ideas in Europe.

Eurozone small- and mid-caps: Eurozone small- and mid-caps are currently trading at a 20-year low price-to-earnings ratio compared to large caps (MSCI EMU). They should benefit from falling rates, improving lending conditions, and healthier domestic growth. In addition they offer some exposure to structural trends, including power generation, decarbonization, and automation.
Swiss high-quality dividends: The 3% dividend yield of the Swiss Performance Index (SPI) is higher than Swiss franc bond yields and above the 25-year historical average of 2.4%. Balance sheets and profitability are robust, in our view, suggesting that distributions are sustainable.

More investment ideas

Position for lower rates

Top investment ideas

We expect central banks to cut interest rates further in the year ahead, reducing cash returns. We believe investment grade bonds offer attractive yields and expect mid-single-digit returns in US dollar terms. Diversified fixed income strategies and equity income strategies can also help investors sustain portfolio income.

Transformational innovation opportunities

Top investment ideas

We expect significant and sustained profit growth in the transformational innovation opportunities of (1) Artificial intelligence and (2) Power and resources. By investing in these areas, we believe investors can earn strong long-term returns.

Sell further dollar strength

Top investment ideas

While the US dollar may stay well bid in the near term, we believe its valuation may now be overstretched. We recommend investors use periods of strength to reduce US dollar exposure through strategies such as hedging dollar assets, switching USD cash and fixed income exposure to other currencies, and through options.

Moving light streaks in front of New York City skyline

Go for gold

Top investment ideas

We expect gold to build on its gains in 2025. Lower interest rates, persistent geopolitical risks, and strong dollar-diversification trends likely see investor and central bank buying continue. Outside gold, we also see long-term opportunities in copper and other transition metals, with demand increasing alongside higher investment into power generation, storage, and electric transport.

Time for real estate

Top investment ideas

We think the outlook for global residential and commercial real estate investments is bright. With declining and constrained supply paired with rising demand, we see opportunities in sectors including logistics, data centers, and multifamily housing. Investors should focus on strategic acquisitions and diversification to capitalize on these favorable market dynamics.

Explore more of the Year Ahead 2025 report

In our base case, we expect sustained economic growth in the US, supported by healthy consumption, loose fiscal policy, and lower interest rates. Tariff threats are a headwind for Asia and Europe. If imposed, they could be partially offset by reactive stimulus measures in China. We expect growth in Europe to modestly improve as interest rates fall

A Trump presidency, coupled with Republican control of Congress, has the potential to reshape the global economic and geopolitical landscape. Key policy areas in focus for investors include tariffs, fiscal policy, deregulation, monetary policy, and international relations.

Read more about the Year Ahead

The 5Ds—debt, deglobalization, demographics, decarbonization, and digitalization—will be significant forces in the decade ahead that present opportunities and risks for investors. In aggregate, we expect them to lead to higher growth and periods of higher inflation over the long term.

Since the beginning of the decade, cash returns have struggled to surpass inflation and bonds have faced headwinds from rising interest rates. In contrast, equities have thrived, and private markets and commodities have offered robust returns. Looking ahead, we expect equities and private markets to continue to offer the highest potential returns.

Read more about the Decade Ahead

Entering 2025, we believe stocks still have more to go, with our base case expectations of growth (despite tariffs), lower interest rates, and AI advancements. In fixed income, we think there is an opportunity to lock in yields for quality bonds. In currencies, while the dollar may remain strong in the short term, we believe it is looking stretched and advocate for selling it at further strength. We also like gold as a diversifier. Finally, we think the global real estate outlook looks promising.

Taking a step back, while these investment ideas present compelling cases for immediate action, developing a strategic plan that links goals with strategies can improve investors’ chance of success and help them stay focused on the bigger picture amid potential market turbulence.

Explore all our Top investment ideas

We aim to provide the direction of travel for the economy and asset classes against a wide range of market outcomes ahead. The upside scenario would see lower taxes, deregulation, and trade deals adding to a positive market narrative built on solid growth and continued investment in artificial intelligence, while the risk scenario is that trade tariffs, excessive fiscal deficits, and geopolitical strife will contribute to higher inflation, weaker growth, and market volatility.

Check out our Forecasts

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In this Year Ahead, we look at key developments that we believe will shape the next stage of these “Roaring 20s,” including US political change, falling interest rates, and transformational innovation in artificial intelligence and in power and resources.

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Disclaimers

Year Ahead 2025: UBS House View
Chief Investment Office GWM | Investment Research

This report has been prepared by UBS AG, UBS AG London Branch, UBS Switzerland AG, UBS Financial Services Inc. (UBS FS), UBS AG Singapore Branch, UBS AG Hong Kong Branch, and UBS SuMi TRUST Wealth Management Co., Ltd.

Global asset class preferences definitions

The asset class preferences provide high-level guidance to make investment decisions. The preferences reflect the collective judgement of the members of the House View meeting, primarily based on assessments of expected total returns on liquid, commonly known indexes, House View scenarios, and analyst convictions over the next 12 months. Note that the tactical asset allocation (TAA) positioning of our different investment strategies may differ from these views due to factors including portfolio construction, concentration, and borrowing constraints.

Attractive: We consider this asset class to be attractive. Consider opportunities in this asset class.
Neutral: We do not expect outsized returns or losses. Hold longer-term exposure.
Unattractive: We consider this asset class to be unattractive. Consider alternative opportunities.

Note: For equities, we have collapsed “Most Attractive” with “Attractive” and “Least Attractive” with “Unattractive” from the five-tier rating system that is found in the Equity Compass into 3 tiers.

Cautionary statement regarding forward-looking statements

This report contains statements that constitute “forward-looking statements,” including but not limited to statements relating to the current and expected state of the securities market and capital market assumptions. While these forward-looking statements represent our judgments and future expectations concerning the matters discussed in this document, a number of risks, uncertainties, changes in the market, and other important factors could cause actual developments and results to differ materially from our expectations. These factors include, but are not limited to (1) the extent and nature of future developments in the US market and in other market segments; (2) other market and macroeconomic developments, including movements in local and international securities markets, credit spreads, currency exchange rates and interest rates, whether or not arising directly or indirectly from the current market crisis; (3) the impact of these developments on other markets and asset classes. UBS is not under any obligation to (and expressly disclaims any such obligation to) update or alter its forward-looking statements whether as a result of new information, future events, or otherwise.

Emerging Market Investments

Investors should be aware that Emerging Market assets are subject to, among others, potential risks linked to currency volatility, abrupt changes in the cost of capital and the economic growth outlook, as well as regulatory and sociopolitical risk, interest rate risk and higher credit risk. Assets can sometimes be very illiquid and liquidity conditions can abruptly worsen. CIO GWM generally recommends only those securities it believes have been registered under Federal US registration rules (Section 12 of the Securities Exchange Act of 1934) and individual State registration rules (commonly known as “Blue Sky” laws). Prospective investors should be aware that to the extent permitted under US law, CIO GWM may from time to time recommend bonds that are not registered under US or State securities laws. These bonds may be issued in jurisdictions where the level of required disclosures to be made by issuers is not as frequent or complete as that required by US laws.

Investors interested in holding bonds for a longer period are advised to select the bonds of those sovereigns with the highest credit ratings (in the investment-grade band). Such an approach should decrease the risk that an investor could end up holding bonds on which the sovereign has defaulted. Subinvestment-grade bonds are recommended only for clients with a higher risk tolerance and who seek to hold higher-yielding bonds for shorter periods only.

Nontraditional Assets

Nontraditional asset classes are alternative investments that include hedge funds, private equity, real estate, and managed futures (collectively, alternative investments). Interests of alternative investment funds are sold only to qualified investors, and only by means of offering documents that include information about the risks, performance and expenses of alternative investment funds, and which clients are urged to read carefully before subscribing and retain. An investment in an alternative investment fund is speculative and involves significant risks. Specifically, these investments (1) are not mutual funds and are not subject to the same regulatory requirements as mutual funds; (2) may have performance that is volatile, and investors may lose all or a substantial amount of their investment; (3) may engage in leverage and other speculative investment practices that may increase the risk of investment loss; (4) are long-term, illiquid investments; there is generally no secondary market for the interests of a fund, and none is expected to develop; (5) interests of alternative investment funds typically will be illiquid and subject to restrictions on transfer; (6) may not be required to provide periodic pricing or valuation information to investors; (7) generally involve complex tax strategies and there may be delays in distributing tax information to investors; (8) are subject to high fees, including management fees and other fees and expenses, all of which will reduce profits.

Interests in alternative investment funds are not deposits or obligations of, or guaranteed or endorsed by, any bank or other insured depository institution, and are not federally insured by the Federal Deposit Insurance Corporation, the Federal Reserve Board, or any other governmental agency. Prospective investors should understand these risks and have the financial ability and willingness to accept them for an extended period of time before making an investment in an alternative investment fund, and should consider an alternative investment fund as a supplement to an overall investment program.

In addition to the risks that apply to alternative investments generally, the following are additional risks related to an investment in these strategies:

Hedge Fund Risk: There are risks specifically associated with investing in hedge funds, which may include risks associated with investing in short sales, options, small-cap stocks, “junk bonds,” derivatives, distressed securities, non-US securities and illiquid investments.
Managed Futures: There are risks specifically associated with investing in managed futures programs. For example, not all managers focus on all strategies at all times, and managed futures strategies may have material directional elements.
Real Estate: There are risks specifically associated with investing in real estate products and real estate investment trusts. They involve risks associated with debt, adverse changes in general economic or local market conditions, changes in governmental, tax, real estate and zoning laws or regulations, risks associated with capital calls and, for some real estate products, the risks associated with the ability to qualify for favorable treatment under the federal tax laws.
Private Equity: There are risks specifically associated with investing in private equity. Capital calls can be made on short notice, and the failure to meet capital calls can result in significant adverse consequences including, but not limited to, a total loss of investment.
Foreign Exchange/Currency Risk: Investors in securities of issuers located outside of the United States should be aware that even for securities denominated in US dollars, changes in the exchange rate between the US dollar and the issuer’s “home” currency can have unexpected effects on the market value and liquidity of those securities. Those securities may also be affected by other risks (such as political, economic or regulatory changes) that may not be readily known to a US investor.

CIO research disclaimer

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