UBS downgrades the U.S. stock market. Here’s what has the investment bank worried
UBS’ top equity strategist, Andrew Garthwaite, recently downgraded his view on U.S. stocks due to various risks looming over the market. Garthwaite cited concerns about a weakening dollar, stretched valuations, and policy turbulence in Washington as key factors driving his decision. As a result, he downgraded American equities to “benchmark” in a fully invested global equity portfolio, signaling a shift in his outlook.
One of the central concerns highlighted by UBS is the risk associated with the weakening dollar. The investment bank forecasts the euro to climb to $1.22 by the end of the first quarter, with potential “asymmetric structural downside risks” to the greenback. Historically, when the dollar depreciates by 10% in trade-weighted terms, U.S. equities tend to underperform by approximately 4% in unhedged terms.
In contrast, foreign markets have been outperforming U.S. stocks this year, driven by a weaker dollar and more attractive valuations. The MSCI World ex-US index has seen an 8% increase in 2026, while Japan’s Nikkei 225 has surged 17% year to date. Similarly, the Stoxx Europe 600 index has risen by 7%, indicating a notable rotation away from American equities. This trend has been exacerbated by concerns over the potential downsides of the artificial intelligence build-out and persistent inflation in the U.S.
Another factor contributing to the U.S. stock market’s vulnerability is the diminishing impact of corporate buybacks. UBS noted that the buyback yield in the U.S. is now comparable to global peers, eroding a key source of support for earnings per share growth and investor sentiment. The combined shareholder yield from dividends and buybacks in the U.S. is now half that of Europe, further highlighting the waning influence of buybacks on market dynamics.
Valuations also pose a challenge for U.S. stocks, as UBS calculations reveal that sector-adjusted price-earnings ratios are 35% higher than international peers. This significant premium, compared to a historical average of 4% since 2010, raises concerns about overvaluation in the market. Additionally, around 60% of sectors in the U.S. trade at higher multiples than their global counterparts, further exacerbating valuation disparities.
Policy volatility under the Trump administration has added another layer of uncertainty for U.S. equities. Changes in tariff policies, proposals to regulate credit card interest rates, and other potential regulatory interventions have created headwinds for the market. Despite these challenges, Garthwaite remains cautiously optimistic about the U.S. economy and equities, pointing out that they tend to benefit more than peers in the early stages of a potential bubble.
Looking ahead, UBS expects artificial intelligence adoption to drive earnings growth across key industries, potentially supporting U.S. equities. The bank’s strategist, Sean Simonds, has set a year-end target of 7,500 for the S&P 500, slightly below the average forecast of 7,629 among top analysts. In a market environment characterized by uncertainty and volatility, investors will need to carefully navigate the evolving landscape to capitalize on emerging opportunities.
