UBS forecasts stock market gains and interest rate shifts

UBS is optimistic about the performance of stock markets in the U.S., Europe, and Asia for the second half of 2026, also releasing new forecasts for interest rate trends in America and Europe. The Swiss bank's new report predicts a 10% increase for the main U.S. stock index, the S&P 500, from current levels over the next twelve months. For European stocks, it forecasts a 5% rise, for Japan a 7% increase, and for the rest of Asia a 10% gain.

These positive predictions are primarily supported by expectations of increased earnings for listed companies. UBS forecasts global corporate profit growth of 21% this year and 12% next year. The financial institution notes that its analysts' base scenario remains that stocks will move higher in the coming six to twelve months. Accordingly, the S&P 500 index is expected to reach 8,200 points by June 2027.

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We expect that continued strengthening of capital expenditures for Artificial Intelligence, a resilient U.S. economy, ongoing fiscal spending worldwide, and strong credit creation will continue to support the growth of corporate earnings and markets in general.

"We expect that continued strengthening of capital expenditures for Artificial Intelligence, a resilient U.S. economy, ongoing fiscal spending worldwide, and strong credit creation will continue to support the growth of corporate earnings and markets in general," the bank's analysts estimate. However, the report also mentions increased risks that could derail these optimistic forecasts. These include a potential loss of investor confidence in AI growth expectations, weaker-than-expected performance from the economy outside of AI, and higher financing costs.

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The first half of the year showed how quickly data can change.

"The first half of the year showed how quickly data can change," the report states. Additional unpredictable factors that could alter the situation include developments in Iran, trade conflicts, and the U.S. midterm elections. UBS characterizes the market's current pricing for further increases in borrowing costs as very aggressive.

Regarding the U.S., UBS believes inflation likely peaked above 4% in May. It estimates that the combination of Federal Reserve Chair Kevin Worls's leadership and differing views on monetary policy among FOMC members suggests short-term shifts in dollar borrowing rates. Slower growth trends and disinflation in the second half of the year should help support a shift toward lower interest rates within 2027. UBS continues to expect the Fed's key interest rate to eventually move toward a range of 3-3.25%, down from the current 3.5-3.75% range. For the ECB, UBS anticipates one more increase in the coming months, although the Swiss bank believes "markets may be overestimating the risk of further increases."

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markets may be overestimating the risk of further increases.