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If the future is anything like the last five years, not even a crystal ball could prepare investors for what's ahead.
Anyone who had known heading into 2020 that a once-a-century pandemic was imminent likely would have unloaded all of their risk assets and braced for a years-long economic contraction.
But that would have been a massive mistake, as a brief global downturn during the health crisis soon yielded to a booming economic recovery. Global markets are up around 50% in the last half decade while GDP growth has surged and US corporate earnings have risen roughly 70%.
"Markets have had a 'roaring 20s' — with five years of strong performance for global equity market indices, technological breakthroughs, and stronger-than-expected US economic growth," strategists at UBS Global Wealth Management (GWM) recently wrote.
Although it's impossible to predict what's next and how markets will respond, the team at UBS GWM gave it a shot in their 2025 outlook report, which was released on November 21.
A key focus of the report is how the global economy may be at a pivot point, following a surge in populist sentiment that culminated in the election of Donald Trump earlier this month.
While Wall Street is confident that there will be a continued boom under Trump, UBS GWM is less sure. This new political regime "might extend or end the Roaring 20s," strategists remarked. What happens may depend in large part on what happens with Trump's tariff policy.
"A tariff shock could trigger a stagflationary downside scenario," UBS GWM strategists said. "At the same time, negotiations with trading partners or domestic legal challenges might mitigate their scope and impact, and tax cuts and deregulation could support a more positive market narrative."
With that in mind, UBS GWM is preaching humility and portfolio diversification to its clients. After all, investors have seen how troubling global events can coincide with rallies, and vice versa.
"We have to be prepared for a wide range of outcomes in the year ahead," Mark Haefele, UBS GWM's chief investment officer, said in a statement.
There are four potential templates that markets could follow in 2025, in UBS GWM's view.
UBS GWM thinks the most likely outcome is that the US economy will continue to grow, even as tariffs are implemented, due to deregulation and bright sentiment from business leaders. In this backdrop, the S&P 500 could rise to 6,600, provided that inflation and interest rates also fall.
"The prospect of lower taxes and deregulation adding to a positive 'Roaring 20s' market narrative built on solid growth, and continued investment in AI" has led to optimism in markets, Haefele noted.
An even more upbeat view is that the S&P 500 will soar to 7,000 thanks to exceptionally strong economic growth and continued excitement about artificial intelligence, all with minimal inflation. Stocks would also benefit from lower taxes, fewer regulations, and trade deals that minimize the pain that tariffs could bring. Interest rate cuts would be the icing on the cake.
Investors will most likely be satisfied at the end of next year, UBS GWM believes, as the firm assigned a 50% likelihood to its base case and a 25% chance to the bull scenario.
However, there's about a one in four chance that next year is marked by major market losses.
A so-called "tariff shock" scenario has about a 15% chance of happening, and it could send the S&P 500 tumbling to 5,100 as a burgeoning trade war sends inflation higher while crushing global growth. In this backdrop, it's hard to see how US stocks could dodge heavy losses.
"The risk scenario is that trade tariffs, excessive fiscal deficits, and geopolitical strife will contribute to higher inflation, weaker growth, and market volatility," UBS GWN strategists said.
Tariffs are far from the only risk to markets. An old-fashioned recession featuring a weaker jobs market and softer consumer spending could send the S&P 500 all the way back to 4,500.
Although there's no way to know which of those four outcomes will occur, UBS GWM spotlighted eight investments that are likely to appreciate.
Technology stocks are among the firm's top ideas, including semiconductor firms and companies tied to artificial intelligence. Tariffs could weigh on growth, but the sector's long-term growth story is likely intact regardless of what happens on the political policy front.
"AI infrastructure spending remains robust, and we expect key semiconductor components needed for AI to remain supply constrained in 2025, supporting pricing," UBS GWM strategists wrote.
Utilities are also a less heralded way to ride AI momentum, UBS GWM noted, plus the group is defensive and could hold up better in a bearish scenario.
"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," UBS GWM strategists wrote.
The other sector that UBS GWM highlighted is financials, which has handily outperformed the market in the last month. Strategists are confident that the group has more room to run.
"We expect Fed rate cuts to lead to lower funding costs, higher loan growth, and more capital market activity," UBS GWM strategists wrote. "Following the US election, we also expect the financial sector to benefit from deregulation."
In international markets, the firm is bullish on Asian stocks outside of Japan as interest rates fall in the region. Additionally, small- and mid-sized European stocks — which are relatively cheap — should benefit from solid economic growth and lower rates, though tariffs are a risk.
Outside of equities, UBS GWM recommends high-quality bonds while interest rates fall. Bond yields have risen lately on the back of Trump's win, since investors now expect higher growth, inflation, and budget deficits. This may be a good time to lock in higher rates, UBS GWM said.
"We believe investment-grade bonds offer attractive yields and expect mid-single-digit returns in US dollar terms," UBS GWM strategists wrote.
Precious metals are also worth owning, UBS GWM said. Gold can continue to rise to $2,900 next year, in the firm's view — and copper, lithium, and nickel also appear to have upside.
"In 2025, we believe gold will remain an effective hedge against key political concerns, including government debt levels, inflation, or geopolitical tensions," UBS GWM strategists wrote.
Lastly, investors should have exposure to real estate, in light of lower interest rates, limited supply, and healthy demand. Residential and commercial properties both make sense, though UBS GWM specifically cited property types like logistics, data centers, and multifamily housing.
