UBS outlines the key market drivers to watch out for in the second half of 2025

Global equities, including the S&P 500 and Nasdaq Composite, rebounded to record highs in the first half of 2025 despite significant volatility from shifting policies and geopolitical events. UBS analysts highlight persistent uncertainties for the second half, including U.S. trade policy, the impact of a large budget bill, ongoing geopolitical tensions, and the Federal Reserve's cautious stance on interest rates. However, UBS does not expect these factors to end the broader economic expansion, anticipating further Fed rate cuts, continued de-dollarization, and structural forces like artificial intelligence and longevity to sustain equity returns, advising investors to align portfolios with these drivers while managing renewed volatility.

Analysis

Global equity markets, including the S&P 500 and Nasdaq Composite, demonstrated significant resilience in the first half of 2025, reaching new record highs despite considerable volatility. This performance occurred against a backdrop of major uncertainties, as outlined by UBS analysts. Key near-term risks include the unresolved U.S. trade policy, with a 90-day tariff pause set to expire, and the fiscal impact of a large spending bill poised to expand the nation's $36.2 trillion debt. Furthermore, geopolitical tensions, particularly a fragile truce between Israel and Iran and the ongoing war in Ukraine, present significant tail risks. The Federal Reserve's monetary policy also remains a source of uncertainty, as the central bank maintains a cautious stance despite some internal signals for an interest rate cut. However, UBS projects that these factors will likely cause periodic market disruptions rather than derailing the economic expansion. Their outlook anticipates a Fed rate cut by year-end, a continued but more moderate 'de-dollarization' trend favoring foreign currencies like the euro, and a corresponding drop in high-grade bond yields. Crucially, UBS maintains that long-term structural growth drivers, such as artificial intelligence and longevity, will continue to support equity returns through the second half of the year.

Key Decisions for Investors

• Investors should consider maintaining strategic allocations to equities, focusing on long-term structural themes like artificial intelligence, while managing portfolio risk against renewed volatility from policy shifts and geopolitical events.
• It is prudent to closely monitor developments in U.S. trade policy, as the expiration of the tariff pause represents a primary catalyst for near-term market swings.
• Given the outlook for a potential Fed rate cut and continued dollar weakness, investors could evaluate positions in non-USD assets and prepare for a potential decline in high-grade bond yields.
• Portfolios should be reviewed for adequate diversification and effective hedging strategies to mitigate potential 'tail risks' stemming from the fragile geopolitical landscape.