Global stocks may travel up 6% through 2025 with the U.S. dodging a hard landing: UBS

UBS set a 900 target for the MSCI AC World Index in 2025, projecting upside of more than 6% from current levels, partially as it expects the world’s largest economy will avoid shifting into a recession.

The MSCI AC World Index was ~6.5% below the 900 level as of Friday, when it was at 844.69. The index is above UBS’s target of 830 target for 2024, and has gained ~16% YTD vs. the S&P 500’s (SP500) rise of ~20%.

Andrew Garthwaite, chief global equity strategist at UBS, in a Thursday note outlined factors behind its central case for the 900 target. The index covers 2,687 stocks in 23 developed markets and 24 emerging markets, representing ~85% of investible equities worldwide.

• Tactical indicators are modestly supportive

A CTA positioning indicator UBS tracks is “bullish” across the board on equities as commodity trading advisors have been adding to equity exposure from middling levels.

Meanwhile, risk appetite is modestly below average and consistent with ~1% U.S. GDP growth. But soft data macro surprises are turning up, and the Atlanta Nowcast is at ~3% for Q3. Risk appetite with ISM as a proxy is at 46, and at this level, equities rise by 5.2%, on average, over the next year, UBS said.

• Fed cuts and no hard landing are “very good” for markets

Fed rate cuts with a soft landing typically lead to markets up ~20% over the next 8 months. “Admittedly, the performance ahead of the rate cut was much better than normal, but history would suggest markets go higher,” Garthwaite said.

The absence of excess in bank balance sheets or private sector balance sheets in Europe or the U.S. is among the factors feeding into UBS's view of the U.S. dodging a hard landing.

• Equity risk premium is still attractive if productivity rises by 1% from 2028 owing to Gen AI

With no adjustments, the ERP is 4.4%. If Gen AI buoys long-term productivity growth by 1% from 2028, then the ERP is 4.9%. In Europe, P/E can be justified by credit spreads and bond yields alone.

• A margin squeeze should be limited in 2025

U.S. wage growth potentially slowing to ~3% should allow the Fed to pursue its maximum employment mandate. It also alleviates the margin squeeze suffered by the bottom 490 stocks in the S&P 500 (SP500). UBS said it is, however, 8% below 2025 consensus for per-share earnings for the AC World Index, at 5% vs. 13%.

The iShares MSCI ACWI ETF (NASDAQ:ACWI) has risen 17% YTD. Here are some emerging market ETFs investors can track: (IEMG), (VWO), (EEM), and (AVEM).

And S&P 500 (SP500) ETFs include: (SPY), (SPXU), (VOO), (RSP), and (IVV).