As the stock market’s impressive bull run shows signs of fatigue, savvy investors need to brace for a potential shift—and not just any minor correction. According to Andrew Garthwaite, UBS’s chief global equity strategist, the market’s current calm is misleading, with volatility poised for a meaningful rebound that could disrupt the upward momentum we’ve witnessed so far in 2025.
Here’s the crux: implied intra-index volatility—a key gauge of market uncertainty—is resting near historic lows. While that might sound reassuring, history tells us the opposite. When volatility starts to climb from these suppressed levels, cyclical stocks, which often lead the charge in bull markets, tend to underperform about 84% of the time. This pattern suggests that the market’s recent strength could be on borrowed time.
What’s driving this caution? Slowing U.S. economic growth. Despite the S&P 500 rallying over 30% from its April lows and pushing its year-to-date gains to 8%, the underlying economic data tells a different story. Labor market indicators, in particular, are flashing warning signs. The 3-month annualized hours worked has dropped sharply, and employment PMIs are signaling slower job growth ahead. UBS forecasts non-farm payrolls to slow dramatically, averaging just 48,000 new jobs per month in Q4, with a potential contraction of 12,000 jobs by the end of the year.
This labor market cooling is critical because employment is a cornerstone of consumer spending, which drives much of the U.S. economy. A weakening labor market could ripple through corporate earnings, consumer confidence, and ultimately, stock prices.
Adding to the pressure, August and September historically rank as some of the toughest months for equities. Garthwaite’s team expects August to be a down month, with the Federal Reserve unlikely to ease monetary policy until September at the earliest. This timing mismatch—slowing growth but no immediate rate cuts—could exacerbate market volatility.
What does this mean for investors and advisors? First, it’s time to reassess risk exposure, particularly in cyclical sectors like industrials, consumer discretionary, and financials, which are more sensitive to economic slowdowns. Diversification into defensive sectors such as utilities, healthcare, and consumer staples may offer a buffer against anticipated volatility.
Second, keep a close eye on labor market data and Fed communications. The interplay between economic indicators and central bank policy will be the market’s compass in the coming months.
A unique insight not often highlighted: this environment favors active management over passive investing. With volatility expected to rise and sector leadership potentially shifting, active managers have the flexibility to navigate choppy waters, adjusting portfolios dynamically to mitigate downside risk.
For example, consider the semiconductor industry, often a bellwether for economic cycles. Recent data from the Semiconductor Industry Association shows a slowdown in global chip sales growth, aligning with the broader economic deceleration. Investors should monitor such sector-specific signals as early warnings.
Looking ahead, the key question is whether the Fed will pivot more aggressively if economic data worsens beyond expectations. If so, a market rebound could follow. If not, we might see a more prolonged period of volatility and sideways trading.
In summary, the market’s recent resilience masks underlying vulnerabilities. Investors should prepare for a potential pause or pullback in the bull run by adjusting portfolios, focusing on quality and defensive positioning, and staying alert to economic and policy developments. The next few months will be critical in defining the trajectory of the market for the rest of 2025.
Sources: UBS Global Research, Semiconductor Industry Association, Bloomberg Economic Reports.
Source: August will be a down month for the market as growth slows, warns UBS