UBS Predicts 15% S&P 500 Drop by 2025 End, Despite Long-Term Gains

UBS has issued a warning that the U.S. stock market is poised for a decline, with the current level of the S&P 500 Index expected to be the highest point for the year. The bank has revised its target for the S&P 500 Index to 6,100 points by the end of 2025, up from the previous target of 5,500 points. Additionally, the target for the end of 2026 has been raised to 6,800 points from 6,100 points. Despite these long-term projections, UBS anticipates that the market will experience a downturn in the short term, potentially falling below current levels by the end of 2025.

UBS's revised targets reflect an improved outlook for the U.S. economy and corporate health, which have exceeded recent expectations. The absence of the worst-case scenario regarding tariffs, combined with confidence in fiscal support and a weakening dollar, has mitigated the impact on earnings. Low interest rate differentials and sustained capital flows continue to provide support.

Looking ahead, UBS notes that previously anticipated adverse factors have been delayed, exerting significant pressure on the cyclical outlook. The combination of U.S. economic growth and inflation could deteriorate, leading to reduced earnings growth expectations and increased market volatility. This could challenge momentum trading driven by capital flows and valuation support.

UBS has identified several upside risks that could drive the S&P 500 Index higher. These include unexpected earnings surprises from technology and related companies, which could push the index to 7,200 points. Additionally, companies affected by tariffs maintaining their profit margins despite increases, a smaller-than-expected impact of tariffs on U.S. inflation, and sustained consumer spending despite reduced disposable income could all contribute to a higher index. Furthermore, a resurgence in U.S. capital expenditure and industrial production, driven by domestic production, foreign direct investment, and new technology applications, as well as more accommodative monetary policy from the Federal Reserve, could also support a higher index.

Conversely, UBS has outlined several downside risks that could lead to a decline in the S&P 500 Index. These include retaliatory tariffs in response to increased tariffs, mass layoffs by companies that have been hoarding labor, leading to reduced consumer income and spending. As excess savings are depleted and disposable income growth stagnates, consumers may significantly cut back on spending. Additionally, if the Federal Reserve's interest rate cuts are smaller than expected, it could dampen market sentiment. Rising import costs could also lead to a significant decline in corporate profit margins, and a loss of confidence in the positive growth impact of the Inflation Reduction Act, industrial repatriation, and increased direct investment could all contribute to a lower index.