Almost all of the preconditions for a market bubble are being met, UBS said. How to hedge
The stock market rally will likely continue into 2025, but investors should consider preparing for the day when the move goes too far, according to UBS. Global strategist Andrew Garthwaite said in a note to clients that his group was “highly optimistic” about finances in 2025, but warned that six of the seven “conditions” for a bubble are in place. Bubble boxes include profit under pressure and loss of market scope. The remaining phase is loose monetary policy, and markets could get another step toward that on Wednesday if the Federal Reserve cuts interest rates for another quarter, as widely expected. If the market turns into a bubble, investors should try to stick with those stocks with long-term growth stories, Garthwaite said. “In the event of a bubble (a 35% chance that we are not yet in), we can choose to invest in areas that are different from this but where you can determine the valuation outside of the bubble,” including artificial intelligence and electrification. , said the note. Stocks identified by UBS as hedges include names that have already seen strong rallies during the AI boom, such as Taiwan Semiconductor Manufacturing, Meta Platforms and energy company Vistra Corp. Vistra is up more than 200% in 2024. VST YTD Mountain Shares of Vistra Corp. more than triple by 2024. While those stocks may look expensive on a valuation basis, identifying names with long-term growth stories can help the portfolio take hold. well above when the market bubble bursts. “The problem with the bubble thesis is that when the bubble bursts, investors often lose 80% of their money (as we saw in the case of the Japanese post office in late 1989, [dot-com] or the Nifty 50). Therefore, we can only assign a 35% chance of a bubble, but this is 10% higher than before,” said the UBS note.
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