Dollar Weakness and Valuations Weigh on Outlook
UBS has reduced its stance on U.S. equities, citing growing concerns about currency trends, elevated valuations and policy uncertainty. Andrew Garthwaite, the bank’s head of global equity strategy, downgraded American stocks to “benchmark” within a fully invested global portfolio, signaling a more neutral position after years of strong outperformance.
A central risk identified by UBS is a weakening U.S. dollar. The bank expects the euro to rise to $1.22 by the end of the first quarter and sees structural downside risks for the greenback. Historically, when the dollar’s trade-weighted index falls 10%, U.S. equities underperform by around 4% in unhedged terms, UBS noted.
So far in 2026, global markets have outpaced U.S. stocks. The MSCI World ex-US index has climbed roughly 8%, while the S&P 500 has been little changed. Japan’s Nikkei 225 has gained 17% year to date and the Stoxx Europe 600 has advanced about 7%, reflecting a rotation toward international assets.
Buybacks and Premium Valuations Under Scrutiny
UBS also pointed to diminishing support from corporate share buybacks. The buyback yield in the U.S. now stands roughly in line with global peers, weakening a key pillar that had bolstered earnings per share growth and investor demand.
The combined shareholder yield from dividends and buybacks is about half the level seen in Europe, the bank said. “The buybacks yield is no longer exceptional,” Garthwaite wrote, warning that the shift could affect valuation support.
Valuation metrics further raise caution. UBS estimates that the sector-adjusted price-to-earnings ratio for U.S. stocks trades at a 35% premium to international peers, compared with an average premium of about 4% since 2010. Approximately 60% of sectors are priced above both global counterparts and their own historical premiums.
Policy Uncertainty and AI as Offsetting Factors
Policy volatility under President Donald Trump is another factor weighing on sentiment. UBS cited evolving tariff measures, proposed caps on credit card interest rates, discussions about limiting private equity investment in housing, renewed debate over drug pricing and potential constraints on dividends and buybacks for defense companies.
Despite these headwinds, UBS stopped short of adopting a bearish outlook. Garthwaite noted that U.S. markets often outperform during the early stages of asset bubbles. The bank also expects artificial intelligence adoption to advance faster in the United States than in most regions, supporting earnings growth across major sectors.
Separately, UBS strategist Sean Simonds set a year-end target of 7,500 for the S&P 500. That compares with an average projection of 7,629 among 14 leading strategists surveyed by CNBC Pro.
