UBS Sets 2025 Target for MSCI All-Country World Equity Index

UBS has established a year-end 2025 price target of 900 for the MSCI All-Country World Equity Index, indicating a modest 6% upside from current levels.

The investment bank highlighted several key factors supporting this forecast:

1. Middling Tactical Indicators

UBS mentions that tactical indicators are currently middling. The UBS risk appetite indicator suggests that risk assets are performing closely to economic momentum, with U.S. GDP growth projected at a moderate 1%. Nevertheless, soft data macro surprises are beginning to emerge, with the Atlanta Nowcast indicating a 3% growth for the third quarter.

2. Equities and Federal Reserve Rate Cuts

UBS points out that history shows equities generally perform well when the U.S. Federal Reserve cuts interest rates without leading to a hard landing, which they do not expect in 2025 or 2026. Traditionally, following rate cuts, equities have produced gains of about 20% over an eight-month period. Though markets have outperformed ahead of anticipated cuts, UBS forecasts an additional 13% rise.

3. Generative AI Impact

UBS foresees that generative AI (Gen AI) will start enhancing productivity from 2028, potentially raising the U.S. equity risk premium (ERP) to 4.9%. Without this projected productivity surge, equities may appear expensive, although Gen AI could provide approximately 10% upside potential, particularly in defensive sectors like healthcare, utilities, and technology.

4. Limited Margin Squeeze

Strategists at UBS expect only a limited margin squeeze in 2025, as U.S. wage growth is anticipated to slow to around 3%. This could relieve some margin pressure for many firms, especially those outside the largest ten U.S. companies. However, UBS’s earnings growth forecast for 2025 stands at 5%, below the consensus estimate of 13%.

5. Credit Environment’s Role

According to UBS, the credit environment remains vital, emphasizing that credit and equities are interconnected. Significant changes in equity performance typically precede shifts in credit spreads, which are crucial for determining their ERP. Currently, default rates are at half the level suggested by high-yield spreads, and the ratio of credit upgrades to downgrades appears favorable.

While UBS anticipates a baseline of 6% upside, they also note a 25% chance of a more optimistic scenario, where equities could surge over 20% if monetary conditions in the U.S. and China become more lenient. Conversely, risks exist, with a 25% possibility of a 10% market decline due to U.S. recession risks and potential challenges from China on global growth.