According to UBS Group, the upward trend in the stock market in 2025 may continue, but investors should be prepared for the day when the market becomes overly inflated.

UBS Group's Global Equity strategist Andrew Garthwaite stated in a report to clients that his team holds a "cautiously optimistic" view on stocks for 2025, but he warned that six out of the seven prerequisites for bubble formation have already appeared.

The prerequisites for a bubble that have already been met include increased pressure on profits and a loss of market breadth. The remaining prerequisite is loose monetary policy, with the Federal Reserve cutting rates by another 25 basis points on Thursday, pushing the market further in that direction.

Garthwaite suggested that if the market really evolves into a bubble, investors should try to stick with stocks that have more sustainable growth stories. The report stated, "In case we have not yet entered a bubble (with a 35% probability), we would prefer to invest in places that could prove to be reasonably valued even without a bubble," including AI and electrification.

Hedge stocks identified by UBS Group include stocks that have already experienced strong upward trends during the AI boom, such as Taiwan Semiconductor, Meta Platforms, and electrical utility Vistra Corp. The stock price of Vistra Corp. more than tripled in 2024.

Although these stocks may seem expensive based on valuation levels, choosing stocks with long-term growth stories can help portfolios maintain their value relatively well when the market bubble bursts.

UBS Group's report stated, "The problem with bubble theory is that when the bubble bursts, investors often lose 80% of their funds (as we saw after the end of 1989 in Japan, the Internet bubble, or Nifty 50). We can only assign a 35% probability to the bubble, but that is 10% higher than before."

Additionally, UBS Group maintains a bullish outlook on Gold for the next 12 months, expecting this Precious Metal to reach $2,900 per ounce by the end of next year. UBS Group recommends allocating about 5% of Gold in a dollar-denominated balanced portfolio as a diversified investment.

UBS Group indicates that central banks around the world are likely to continue increasing their Shareholding in Gold to achieve reserve diversification. The latest data from the International Monetary Fund (IMF) shows that global central bank net purchases of Gold reached the highest monthly level of the year in October. UBS Group expects that, driven by de-dollarization, central banks will purchase 982 tons of Gold this year, higher than the bank's previous forecast of 900 tons.

Editor/ping