The stock market rally will likely continue in 2025, but investors should consider preparing for the day when the move goes too far, according to UBS. Global equity strategist Andrew Garthwaite said in a note to clients that his team is “cautiously optimistic” about equities in 2025, but warned that six of the seven “preconditions” for a bubble are in place. The boxes that have already been checked for a bubble include profits under pressure and loss of market breadth. The remaining category is loose monetary policy, and markets could get another step toward that on Wednesday if the Federal Reserve lowers interest rates another quarter point, as is widely expected. If the market does evolve into a bubble, investors should try to stick to those stocks with more durable growth stories, Garthwaite said. “Just in case there is a bubble (35% chance) that we are not yet in, we would favor investing in the areas that are different this time around but where you can justify the valuation without a bubble,” including artificial intelligence and electrification, the note said. The stocks that UBS identified as hedges include names that have already seen strong rallies during the AI boom, such as Taiwan Semiconductor Manufacturing , Meta Platforms and power company Vistra Corp . Vistra is up more than 200% in 2024. VST YTD mountain Shares of Vistra Corp. have more than tripled in 2024. While those stocks may look expensive on a valuation level, identifying the names with long-term growth stories could help a portfolio hold up relatively well if and when a market bubble bursts. “The problem with a bubble thesis is that when a bubble bursts, investors tend to lose 80% of their money (as we saw in the case of Japan post late 1989, [dot-com] or Nifty 50). Thus, we can only put a 35% chance on a bubble, but this is 10% higher than before,” the UBS note said.
Nearly all the preconditions for a market bubble are met, says UBS. How to hedge
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