Despite the S&P 500’s impressive 23% rise this year, UBS strategists, led by Andrew Garthwaite, argue that U.S. stocks have not yet entered a bubble, primarily due to insufficiently loose monetary policy. Their report identifies six out of seven necessary conditions for a bubble, including the end of a structural bull market, pressured corporate profits, reduced market breadth, a 25-year gap from the last bubble, high retail investor participation, and a belief that “this time is different.”
The missing element is a loose monetary policy. The Federal Reserve’s recent rate cut to 4.25%-4.50% remains restrictive. UBS suggests that a federal funds rate of around 3.2% is needed, implying further cuts of 100 basis points. Such conditions could redirect funds from money market accounts into stocks, potentially inflating a bubble.
UBS estimates a 35% chance of a bubble by 2025, with the S&P 500 possibly surging by at least 20%. To hedge against bubble risks, Garthwaite recommends investing in reasonably priced AI and electrification stocks, such as TSMC, Meta, PG&E, National Grid, and Vistra.
