UBS Predicts Increased Volatility for S&P 500 in 2025

UBS Anticipates Elevated Volatility for S&P 500 in 2025

UBS has made a significant forecast suggesting that the S&P 500 will experience elevated volatility throughout 2025. This prediction stems from various factors including macroeconomic uncertainties, shifting policy rates, and potential geopolitical risks that could influence market stability.

The End of the Low Volatility Era

According to UBS analysts, the low volatility period observed in 2024 has concluded. They highlight that lingering disruptions from the Covid era continue to affect the global economy, shifting from social or political disturbances to more deep-rooted challenges within business and market cycles.

Global Economic Outlook

The depletion of government stimulus measures is expected to slow down nominal growth, particularly in major economies like China and the US. UBS cautions that regional disparities in economic activity might persist. Notably, these disparities could be exacerbated by varying policy implementations and economic strategies. Interestingly, the gap between services and manufacturing sectors may start to narrow, presenting a unique dynamic for investors.

Historic Patterns of Volatility

UBS strategists observe historical trends where slower nominal growth, coupled with rate cuts, typically leads to increased volatility in the market. This volatility often stems from uncertainties surrounding economic downturns, including rising unemployment or mid-cycle slowdowns. Until clarity emerges around these economic factors, intermittent spikes in market volatility are expected, particularly in reaction to growth-related developments.

Macroeconomic Policies and Tariff Concerns

Speculation around significant policy changes could also contribute to the unpredictability of the economic milieu. Additionally, the potential for escalating tariff tensions may complicate the scenario further, as UBS points out that tariffs can have wide-ranging redistributive effects across various regions, sectors, and companies. Notably, European equities and banks might face vulnerabilities, while the US could experience more uncertainty regarding tariff pass-through dynamics.

VIX Predictions for 2025

UBS foresees the VIX, a critical measure of market volatility, averaging around 20% in 2025, significantly higher than in the previous year. Furthermore, they believe that volatility-of-volatility will remain elevated, with the VVIX expected to average 110% or more. These predictions underline a landscape where market players must navigate through a higher degree of uncertainty.

Profit Growth and Market Correlations

In recent times, a disparity in earnings has become evident, driven largely by substantial profit growth in major US tech companies. UBS anticipates that this divergence will soon align more closely with the broader market, potentially alleviating the pressure that has kept stock correlations low. However, concerns around early 2025 earnings may arise if hyperscaler capex projections fail to meet the aggressive revenue forecasts set forth by companies like NVIDIA.

Conclusion: Preparing for Economic Variability

As such, strategists warn that weaker earnings revisions could lead to increased stock correlations, potentially propelling higher volatility throughout the year. Investors and market participants must brace themselves for an unpredictable year ahead, focusing on adaptability and resilience in their strategies.

Frequently Asked Questions

What factors are leading to increased S&P 500 volatility in 2025?

Increased volatility is anticipated due to macroeconomic uncertainties, changing policy rates, and geopolitical risks affecting the global market.

How is global economic growth expected to change in 2025?

Global economic growth is expected to slow down, particularly in major economies due to depleted government stimulus and continued disruptions from previous economic conditions.

What role do tariffs play in market uncertainty?

Tariffs can lead to significant redistributive effects across regions and sectors, adding layers of complexity and unpredictability to the economic outlook.

What is the expected average VIX for 2025 according to UBS?

UBS expects the VIX to average around 20% in 2025, marking an increase compared to 2024's averages.

How might tech earnings influence market volatility?

Weak earnings revisions in the tech sector could increase stock correlations, potentially resulting in higher market volatility as the year progresses.

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