UBS strategists caution that global stock markets may revisit early-2025 lows before making a modest recovery by year-end. They project that the MSCI AC World Index will finish 2025 around 830, representing a 5% increase over current figures. However, this journey is expected to be tumultuous.

Immediate Risks to Monitor

• Optimistic Revenue Targets: Companies may struggle to reach high revenue expectations if trade and supply chain shocks persist.

• Financial Condition Tightening: High credit spreads and elevated U.S. P/E ratios leave limited room for any expansion in multiples.

• Earnings Cuts Ahead: A 1% drop in global GDP typically translates to an approximate 8% reduction in global EPS, with the U.S. (which contributes to 60% of global profits) at higher risk.

• Possibility of Chinese Dumping: A surge in exports from China could saturate markets and compress margins in cyclical sectors.

Valuation Insights

According to UBS, the current equity risk premium sits at 4.9%, offering minimal valuation cushion. Cyclical stocks are comparatively expensive compared to defensives, indicating a precarious setup as sustained rallies generally depend on cyclical sector leadership.

Possible Outcomes for MSCI AC World

Base Case: 10% Tariff, 60% Impact on China

• Year-End Projection: 830 (5% upside)

• Fed Funds Rate: Anticipated to reach 3.4% by December, as economic stability helps facilitate a proactive Fed in the latter half of 2025.

Worst-Case Scenario: Unchanged Tariffs

• Potential Dip: The MSCI AC World could plummet to 680 (down 14%) before recovering late in the year if policies shift positively.

• S&P 500 Projections: It could test 4,500 under this scenario.

Blue-Sky Scenario: Tariffs Being Rolled Back

• Best Outlook: The index might soar to 910 (15% potential upside) due to a broad uplift in sentiment, tighter credit spreads, and reaffirmed growth optimism.

UBS attributes only a 25% probability to a full-blown bear market, highlighting that likely fiscal stimulus from China and Europe could help to mitigate a global recession.

Actions for Investors

1. Prepare for Volatility: Anticipate near-term declines; utilize dips to acquire selectively in cyclicals at improved entry points.

2. Watch for Policy Shifts: Stay updated on U.S.-China trade discussions and central bank commentary that might break the current stalemate.

3. Reassess Risk Premia: Be aware of heightened credit spreads and P/E ratios; consider defensive sectors if spreads further widen.