The S&P 500 is expected to experience elevated volatility in 2025, according to UBS. This is due to a combination of factors such as macroeconomic uncertainties, shifting policy rates, and geopolitical risks. The low volatility environment seen in 2024 is expected to come to an end.
The effects of the Covid-19 pandemic continue to disrupt the global economy, with challenges now more focused on business and market cycles rather than social or political factors. As government stimulus measures decrease, a slowdown in nominal growth is anticipated, particularly in major economies like China and the United States. Regional disparities in economic activity may persist, influenced in part by the previous administration's America-first policies, which could lead to a narrowing divide between the services and manufacturing sectors.
Slower nominal growth and rate cuts have historically been associated with increased volatility, especially when there is uncertainty about the nature of economic slowdowns. Until these dynamics become clearer, intermittent spikes in volatility are expected, particularly in response to growth-related data. Geopolitical risks and economic uncertainty add another layer of unpredictability to the economic landscape. The escalation of tariff tensions could further complicate the outlook, with potential redistributive effects across regions, sectors, and companies. European equities and banks are considered vulnerable to these developments, and the uncertainty surrounding tariff pass-through mechanisms is highest in the United States.
UBS predicts that the VIX, a key measure of market volatility, will average around 20% in 2025, with volatility-of-volatility remaining high. Earnings dispersion has been high, driven by strong profit growth among large U.S. technology companies, but UBS expects this dispersion to narrow as mega-cap tech aligns more closely with the broader market. Weak earnings revisions could increase stock correlation and drive higher volatility throughout the year. The interplay between earnings performance and market volatility will be crucial for investors to monitor.
Overall, the outlook for 2025 suggests a complex interplay of economic factors, policy changes, and market dynamics that could significantly impact volatility in the S&P 500 and beyond. Investors will need to stay vigilant in assessing the implications of these developments on their portfolios.