Swiss investment banking giant UBS' wealth management arm has downgraded its outlook for the US equity market, represented by the S&P 500 Index (SP: .INX).
The firm has adjusted its year-end target for the US market benchmark from 6,400 to 5,800 points, a potential gain of 7.5% from Monday's levels.
This revision stems from a combination of moving parts, most recently spurred by the current US administration's announcement of reciprocal trade tariffs.
What does this mean for the S&P/ASX 200 Index (ASX: XJO) and global stocks? Let's dive in and and see.
Why UBS downgraded its S&P 500 forecast
It's hard to have missed last week's announcement that the US placed a series of reciprocal tariffs on its entire list of trading partners.
The moves, largely anticipated by many, although not to the degree announced, caused a large sell-off in global stock markets, which looks set to continue this week.
UBS, along with a number of global investment banks, reduced its outlook on US markets for 2025, downgrading its projection on the S&P 500 Index.
The downgrade comes as UBS analysts note that several factors, particularly long-lasting tariff increases, would stall corporate profits "for the year".
But it's not all doom and gloom, the bank says.
Firstly, it expects the "tariff rates will eventually be negotiated lower", although not in a "quick reversal".
Second, it sees potential value in US shares if the S&P 500 Index continues to track lower.
While we have lowered our view on US equities from Attractive to Neutral, we think the risk-reward for stocks gets more appealing if, all things being equal, the S&P 500 dips into the low 5,000s.
We also note that there are a number of indicators that suggest that the market is setting up for a rebound. Sentiment is poor, positioning is getting depressed, volatility is elevated, and the S&P 500 is already down 12% from its high. All of these indicators suggest to us that a rally is a growing possibility.
Since tariff fears are what drove us into the sell-off, any softening in tariff expectations would likely be a key ingredient for a market rebound. This could unfold across multiple different angles. For example, President Trump could pivot to agreeing to lower tariff rates, whether due to successful business lobbying, political pressure, or concessions from trading partners. It's also possible the courts could block the implementation.
Despite this, for 2025, UBS lowered its earnings per share (EPS) growth forecast for companies in the index to 3%, down from an earlier estimate of 7%.
What does this mean for Aussie investors?
For Australian investors, UBS' revision underscores how things change in the short-term financial markets.
The S&P 500, often seen as a sort of barometer for global equities, directly influences the Australian stock market, particularly in sectors such as technology and consumer goods.
It's important to note that UBS does not entirely rule out a recovery. In its "upside scenario", if tariff concerns ease and artificial intelligence (AI) accelerates productivity, the S&P 500 could push higher, reaching a target of 6,500 by December 2025.
From this perspective, we wouldn't get overly cautious right now. Instead, we think it is prudent to start to look for opportunities to buy on further weakness.
On the flip side, if a "hard landing" occurs due to persistent tariffs or geopolitical tensions, the index could fall to as low as 4,500. The S&P 500 was last at 5,074 points.
Foolish takeaway
The current market volatility might seem unsettling. But it's crucial to remember that short-term market fluctuations are an unavoidable part of investing in the stock market. It is times like this when investment management skills such as diversification shine.
No one has a crystal ball, but as Betashares show, global markets experience a steep decline of about 10% every three years or so.
There is no telling what the outcome here might be. In the meantime, however, it pays to keep a long-term perspective.
