UBS sees ’clear’ upside risk to its MSCI ACWI price target

Investing.com -- UBS is sticking with its year-end 2026 target of 1,020 for the MSCI All-Country World Equity Index (ACWI) and sees ‘clear risk to the upside,’ even as markets face near-term consolidation pressures.

The bank’s strategists flagged near-term risks, including high positioning, moderating earnings momentum and signs of softer U.S. domestic demand. Risk appetite, they noted, is not fully consistent with weakening ISM data.

Still, sentiment is supported by markets treating weak economic news as positive, since it increases the likelihood of Federal Reserve easing. Futures are pricing in rates around 3.1% by end-2026, giving the Fed scope to act more proactively.

At the center of the upside case is the so-called “bubble scenario.” Six out of seven preconditions for an equity bubble are already in place and that “if the Fed cut by another 75bp, then we have ALL the preconditions for a bubble that we are not yet in," strategists Andrew Garthwaite and Marc el Koussa wrote. 

The bank assigns a 35% probability to such an outcome, compared with roughly 20% priced by markets. In that event, the MSCI ACWI could climb to at least 1,100.

Generative AI is viewed as a possible spark, with the potential to lift productivity growth by as much as 2 percentage points—similar to the tech boom of the late 1990s. UBS argued that even the perception of such gains could be enough to drive valuations materially higher.

The team also pointed to government balance sheets being in far worse shape than corporate ones, a backdrop that may justify structurally lower equity risk premia.

History also favors further gains if the Fed cuts rates without triggering recession. UBS noted that in such cases, the S&P 500 has typically risen 17% over the following year, while corrections of just under 20% that narrowly miss becoming bear markets have often been followed by strong rallies.

Another important factor is the tariff backdrop. Strategists said the effects may prove more moderate than expected, as tariff revenues help fund fiscal stimulus. UBS estimates a fiscal boost of around 0.45% of GDP over six quarters, with evidence that other countries are simultaneously reducing trade barriers.

It also highlighted the wealth effect from equity gains, pointing out that U.S. households hold about $57 trillion in financial assets tied to equities. A 10% rise in stocks therefore equates to 0.6%–1% of GDP, further easing financial conditions and amplifying upside risk in a bubble scenario.

On the earnings front, strategists noted that about 70% of U.S. earnings growth is coming from technology and related sectors, while healthcare is playing a larger role in global EPS growth.

A weaker dollar and well-behaved wage growth are helping to offset margin pressure outside the largest firms. Stable credit spreads add further support, suggesting valuations are near fair value.

UBS’s scenario analysis assigns a 55% probability to its central case, which implies the MSCI ACWI at 1,000 by end-2026, alongside a 35% “blue sky” bubble scenario of 1,133 and a 10% downside “black sky” case of 770.

The bank’s "bubble scenario" implies around "15% upside, at least,” the note said.