The stock market rally is expected to continue in 2025, but investors should be prepared for a potential bubble. UBS global equity strategist Andrew Garthwaite expressed cautious optimism about equities in 2025, but warned that six out of seven prerequisites for a bubble are already present. These include declining profits and a shrinking market breadth.
The remaining factor is loose monetary policy, which could be further fueled by the Federal Reserve's anticipated interest rate cut on Wednesday. If a bubble does emerge, UBS recommends focusing on stocks with strong, sustainable growth narratives. Garthwaite suggests investing in areas like artificial intelligence and electrification, which offer long-term value even in a volatile market. UBS has identified stocks like Taiwan Semiconductor Manufacturing, Meta Platforms, and Vistra Corp as potential hedges. These companies have already experienced significant growth during the AI boom, with Vistra's shares tripling in 2024. While these stocks may appear overvalued, their long-term growth prospects could help mitigate losses if a market bubble bursts. While recognizing the 35% chance of a bubble, UBS cautions that investors tend to lose a significant portion of their investments during such events.
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