The year 2025 is expected to see elevated volatility in the S&P 500, according to UBS. This is due to a combination of factors such as macroeconomic uncertainty, shifting policy rates, and geopolitical risks.
The ongoing disruptions from the Covid era continue to impact the global economy, with challenges now more rooted in business and market cycles rather than social or political factors. As government stimulus measures have largely been exhausted, nominal growth is anticipated to decelerate, particularly in major economies like China and the United States. This slowdown may be exacerbated by regional disparities in economic activity, influenced in part by the America-first policies of the previous administration.
Historically, periods of slower nominal growth and rate cuts have been associated with increased volatility. Uncertainty regarding whether economic slowdowns will lead to rising unemployment or represent a mid-cycle adjustment often drives market fluctuations. Until there is greater clarity on these issues, markets are expected to experience intermittent spikes in volatility, especially in response to growth-related data releases.
The potential for significant policy changes under the Trump administration adds another layer of unpredictability to the economic outlook. The possibility of escalating tariff tensions could further complicate matters, with tariffs expected to have redistributive effects across various regions, economic sectors, and companies. European equities and banks are viewed as particularly vulnerable, while the uncertainty surrounding tariff pass-through mechanisms is highest in the U.S., which could have global implications.
UBS forecasts that a key measure of market volatility will average around 20% in 2025, a notable increase compared to the previous year. Additionally, volatility-of-volatility is expected to remain high, likely averaging 110% or more. This elevated volatility is expected to be influenced by a range of factors, including economic data releases and potential shifts in policy.
The anticipated increase in volatility presents challenges and opportunities for investors. Strategies that account for heightened volatility may become increasingly important as market conditions become more unpredictable. Investors may need to reassess their portfolios and consider how to navigate potential market fluctuations. Moreover, the evolving economic landscape, characterized by slower growth and potential policy shifts, may require a more nuanced approach to investment. Understanding the implications of tariff policies and regional economic disparities will be crucial for making informed decisions in this environment. Staying attuned to economic indicators and corporate earnings will be essential for investors looking to capitalize on emerging trends.
In summary, the outlook for 2025 suggests a complex interplay of factors that will shape market volatility and investor sentiment. With macroeconomic uncertainties and geopolitical risks at the forefront, the financial landscape is poised for significant changes that could redefine investment strategies in the coming year.