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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.
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.
US: AI, tech, financials, and utilities to driver further upside
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
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.
Europe: Focus on Eurozone small- and mid-caps and Swiss high-quality dividends
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.
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Disclaimers
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.