UBS warns the market has it wrong on the Fed. The bank sees the central bank as less hawkish than futures pricing suggests, forecasting a 25 basis point rate cut in December 2025 - with an 84% probability - followed by two additional cuts by the end of the first quarter of 2026.
UBS points to softening U.S. data that markets haven't fully absorbed. The bank expects the Fed to shift from inflation hawk back to growth guardian, a move that would reshape the yield curve and impact rate-sensitive assets.
On earnings, UBS projects S&P 500 profit growth of 11% in 2025 and 10% in 2026 - strong numbers by historical standards.
If the forecast holds, lower rates would support equities, particularly growth stocks, technology, and real estate. Bond prices would rise as yields fall. UBS also highlights gold as a key beneficiary, since lower rates reduce the opportunity cost of holding the non-yielding asset.
Investors should watch fed funds futures closely. The gap between UBS's forecast and market pricing is where opportunity - or risk - lies.