As global markets digest a new wave of US tariffs and a worsening trade row between Washington and Beijing, UBS is warning investors not to expect a smooth ride.
In its latest equity outlook, the bank says markets are likely to retest recent lows (or even slip slightly beyond them) before staging a modest rebound by the end of the year.
UBS expects the MSCI All Country World Index (ACWI), a broad global equity benchmark, to end 2025 at 830, around 5% above current levels. But getting there won’t be easy. “
There are four major near-term headwinds,” the bank writes in a note, pointing to stubborn inflation, high bond yields, stretched equity valuations and slowing earnings growth.
What’s weighing on markets?
First, UBS highlights the equity risk premium (ERP), a key valuation measure that compares stock market returns to bond yields, as offering little cushion for investors.
At 4.9%, the ERP is not providing enough of an incentive to own equities, particularly with corporate bond spreads and government yields on the rise. The last time price-to-earnings (P/E) ratios were this elevated in a correction, the Federal Reserve was cutting rates, which isn’t the case today.
Second, earnings look vulnerable. UBS estimates that for every 1% drop in global GDP, global corporate earnings per share (EPS) fall by about 8%.
With tariffs already starting to bite, the risk is that consensus earnings forecasts (currently pointing to a 10% rise in 2025) prove too optimistic.
Third, the Fed’s current policy stance is, in UBS’s view, “abnormally reactive” due to persistent inflation.
While the bank expects the US central bank to become more proactive later this year, the near-term policy environment remains uncertain.
Fourth, the note argues that cyclical stocks (those tied closely to the health of the economy) are not attractively valued relative to defensive sectors like healthcare or utilities.
That matters because around two-thirds of the time, cyclical sectors move in tandem with the wider equity market.
What could turn things around?
UBS lays out a “moderation” scenario, its central case, where tariffs remain but stabilise, most notably a 10% blanket tariff with additional pressure on China.
In this case, bond yields fall slightly, the Fed begins to ease policy in the second half, and global GDP slows but avoids recession thanks to fiscal support in Europe and China. Under these conditions, markets stage a late recovery, pushing the MSCI ACWI up to 830.
More optimistic is a “blue-sky” scenario in which geopolitical tensions cool sharply. Tariff threats recede, spreads tighten, and global EPS growth reaches 7%. That could lift the MSCI ACWI to 910 — a 15% gain.
Where’s the risk?
The longer tariffs drag on, the more vulnerable US markets become, UBS warns.
Much of Wall Street’s strength has been underpinned by high profit margins in technology, which are now facing pressure from rising capital costs. If credit spreads widen further and valuations revert to pre “Magnificent Seven” norms, US fair value could fall by 7%, wiping out gains.
UBS’s base case isn’t doom and gloom, but it is cautious. With sentiment indicators subdued and investors still rattled, the road to recovery will likely be bumpy, and investors should brace for more turbulence before any end-of-year lift.
