UBS Downgrades U.S. Stocks Amidst Economic Concerns

UBS’s leading equity strategist has reevaluated his stance on U.S. stocks, primarily due to increasing worries about a weak dollar, inflated valuations, and ongoing policy uncertainties in Washington.

Andrew Garthwaite, the head of global equity strategy at the bank, has now positioned U.S. stocks as the “benchmark” for a fully invested global equity portfolio. He argues that the trends that have previously driven significant outperformance are beginning to diminish.

Garthwaite highlights that the risk posed by the dollar is particularly troubling. UBS forecasts that the euro could climb to $1.22 by the end of the first quarter and sees notable structural risks to the dollar. Historically, a 10% drop in the trade-weighted dollar index results in U.S. stocks underperforming by about 4% unhedged, according to the bank.

This year, foreign markets have outperformed the U.S., largely due to a weaker dollar and favorable valuations enticing capital away from the U.S. The MSCI World Index, excluding the U.S., showed an approximately 8% increase in 2026. In contrast, U.S. stocks, including the S&P 500, have faced challenges, with domestic concerns about artificial intelligence developments and persistent inflation putting pressure on the market.

Meanwhile, corporate stock buybacks—a significant factor in the stability of U.S. stocks—are reportedly losing steam. UBS indicates that U.S. buyback yields now align more closely with global averages, which diminishes their previous role as a key driver of earnings growth and investor interest. According to UBS, returns from dividends and buybacks in the U.S. are currently about half of what is seen in Europe.

“Share buyback yields have become less of an anomaly; they had previously been a major factor behind capital flow and earnings per share growth,” Garthwaite noted.

Concerns about valuation persist, with UBS calculating that sector-adjusted price-to-earnings ratios for U.S. stocks exceed those of international stocks by 35%. This comes in stark contrast to an average premium of only about 4% since 2010. Notably, around 60% of sectors not only trade at higher valuations than their international counterparts but also exceed their historical averages.

Additionally, the strategic environment under President Donald Trump raises further challenges. UBS notes this year has seen shifts in tariff policies, proposed caps on credit card interest rates, potential restrictions on private equity investments in housing, and reassessments of drug prices and stock buyback regulations for defense firms.

Despite these issues, Garthwaite does not take a completely pessimistic view. He claims that the U.S. economy and its stock market often fare better than others during the initial phases of a possible market bubble. Furthermore, UBS anticipates that advancements in artificial intelligence will likely outstrip most major regions outside of China, supporting ongoing revenue growth in significant sectors.

UBS strategist Sean Simmons has set a target for the S&P 500 at 7,500 by year-end, which is slightly below the average target of 7,629 from 14 leading strategists, as per a CNBC Professional Strategist Survey.