Global stock markets are expected to remain in a consolidation phase in the near term, as investors navigate heightened uncertainty and a broad range of possible economic outcomes, according to UBS strategist Andrew Garthwaite.
UBS has set a 2026 target of 1,100 for the MSCI All-Country World Index, slightly below its previous forecast of 1,130. With the index currently trading around 1,015.60, this outlook suggests limited upside potential alongside continued market volatility.
Wide Range of Market Scenarios
UBS highlights a significant divergence in potential outcomes for global equities. In a bullish scenario, a swift resolution to Middle East tensions combined with stronger productivity gains driven by artificial intelligence could push the MSCI ACWI to 1,280.
On the other hand, a more negative scenario involving a prolonged conflict lasting three months or longer, coupled with weak productivity growth, could see the index fall to around 700. This would represent a decline of roughly 30% from current levels.
The bank also warned that even in a faster resolution scenario, markets may be underestimating supply chain disruptions, particularly in key commodities such as sulphuric acid, jet fuel, and liquefied petroleum gas (LPG), especially in regions like India.
Key Factors Weighing on Markets
According to UBS, several short-term headwinds are keeping global equities range-bound. Market sentiment indicators remain elevated, with the bank’s Risk Appetite gauge sitting in the top 15% of its 10-year range.
Investor positioning across both systematic and discretionary strategies remains largely neutral, suggesting a lack of capitulation that typically signals a market bottom.
Defensive sectors, including consumer staples and pharmaceuticals, have not significantly outperformed, indicating that investors are not fully pricing in a potential economic slowdown.
Meanwhile, commodity markets are sending mixed signals. Oil prices point to temporary supply disruptions, while rising bond yields suggest that inflation risks may still be underestimated.
What Investors Should Watch
UBS identifies several critical indicators for the months ahead. Oil prices remain a key driver, given their historical impact on equity markets during geopolitical crises.
Credit spreads are another important signal. So far, only modest widening has been observed, indicating that financial conditions remain relatively stable.
Inflation expectations and wage growth in the United States also appear contained, allowing the Federal Reserve to look past short-term energy-driven inflation spikes. However, the inflation outlook in Europe remains more fragile.
Long-Term Outlook Remains Supported
Despite near-term uncertainty, UBS maintains a constructive long-term view on equities. Structural factors, particularly the potential for generative AI to boost productivity from 2028 onwards, are expected to provide support.
While the bank acknowledges that some conditions for a market bubble exist, current trends suggest a period of consolidation rather than a full-scale market downturn.
