UBS Downgrades U.S. Stock Market Amid Global Shifts

UBS has downgraded American equities to "benchmark" status within a fully invested global equity portfolio, citing a range of concerns that indicate a significant shift in market dynamics. The investment bank's head of global equity strategy, Andrew Garthwaite, highlighted that foreign markets are outperforming the U.S. this year, with the MSCI World ex-US index gaining approximately 8% compared to a stagnant performance from the S&P 500. Notably, Japan's Nikkei 225 has surged by 17% year-to-date, while the Stoxx Europe 600 has risen by 7%, reflecting a marked rotation of capital away from U.S. stocks.

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Several key factors contribute to UBS's cautious outlook on U.S. equities. A primary concern is the weakening dollar, which UBS forecasts will climb to $1.22 against the euro by the end of the first quarter. Historically, a 10% decline in the dollar's trade-weighted index has resulted in a 4% underperformance of U.S. equities in unhedged terms. Additionally, the bank notes that corporate buybacks, previously a significant driver of earnings per share growth, are losing their effectiveness. The buyback yield in the U.S. is now comparable to global peers, diminishing its role in attracting investor flows.

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Valuation concerns also loom large, with UBS reporting that the sector-adjusted price-earnings ratio for U.S. stocks is 35% higher than that of international counterparts, a stark contrast to the average premium of about 4% since 2010. Approximately 60% of sectors are trading at higher multiples than their global peers and above their historical premiums.

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UBS points to policy volatility under President Donald Trump as an additional headwind for U.S. equities. The year has seen various shifts in tariff policies, proposals to cap credit card interest rates, and renewed scrutiny of drug pricing, among other regulatory changes. Despite these challenges, Garthwaite refrained from adopting an outright bearish stance, suggesting that the U.S. economy and equities may benefit during the early phases of a potential market bubble.

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Looking ahead, UBS anticipates that the adoption of artificial intelligence in the U.S. will likely outpace that of most other major regions, with the exception of China, potentially supporting earnings growth across key industries. UBS strategist Sean Simonds has set a year-end target of 7,500 for the S&P 500, which is slightly below the average forecast of 7,629 among 14 leading strategists.

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While UBS's analysis presents a cautious outlook, some analysts argue that the U.S. market's resilience and innovation, particularly in technology and AI, could counterbalance these concerns. They emphasize that the long-term growth potential remains strong, despite short-term volatility.

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• “The buybacks yield is no longer exceptional and this had been an important driver of funds flow, EPS and valuation,” — Andrew Garthwaite, Head of Global Equity Strategy, UBS.

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• “economy and equities tend to benefit more than peers when markets are in the early phases of a potential bubble.” — Andrew Garthwaite, Head of Global Equity Strategy, UBS.

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