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Investing.com -- UBS sees rising odds for a bullish outcome in global equities, with its "Blue Sky" scenario gaining momentum despite near-term risks.
In its latest global equity strategy note, UBS said, “The probability of a Blue Sky scenario of 940 MSCI AC World (= 7%) upside looks higher. Even before today, we had been biased towards this scenario.”
While UBS still expects some near-term market consolidation, it emphasized that the setup for a broader rally is improving.
“We could potentially end up with all seven preconditions for a bubble by year-end,” UBS wrote.
Under this “Very Blue Sky – or Bubble – Scenario,” UBS estimates upside of more than 20% for global stocks.
The bank argued that even with recent geopolitical developments and macro uncertainties, the likelihood of an extreme downside is diminishing.
“The Very Blue Sky Scenario has a greater probability than the Black Sky,” the bank said, referring to a scenario where tariffs return to ideological levels.
UBS pointed to multiple factors supporting its optimism, including moderate tariffs, market sensitivity to financial conditions, and the ability of U.S. trade partners to offer concessions.
“Financial markets do matter,” UBS said, noting that equities account for 22% of household assets in the United States and significantly influence GDP.
UBS also acknowledged valuations are stretched, saying the S&P 500 appears “4% overvalued.” However, it highlighted that earnings revisions and technical factors may still favor equities.
“The Blue Sky scenario is dependent on five supports, four of which are not that dependent on the outcome of tariffs,” UBS wrote.