UBS Turns Bearish on U.S. Stocks
UBS has officially downgraded its outlook for the U.S. stock market. The investment bank warns that key drivers of past performance, like corporate buybacks, are weakening and cites "asymmetric structural downside risks" to the dollar.
A key driver of the U.S. stock market's long bull run, corporate share buybacks, is losing its potency. While S&P 500 companies executed a record $942.5 billion in buybacks in 2024, the resulting buyback yield fell to a four-year low of 1.89%. This suggests that even record spending is having a diminished impact on earnings per share as stock prices remain elevated. Valuations for U.S. equities are a growing concern when compared to global markets. The S&P 500's trailing price-to-earnings ratio stands at approximately 29, well above its historical median of about 18. In contrast, the MSCI ACWI ex-USA index trades at a more modest trailing P/E ratio of around 20.6, highlighting the significant premium investors are paying for U.S. stocks. A rotation of investment capital out of the U.S. and into international markets is already underway. In 2025, the Morningstar Global Markets ex-US Index surged by 32%, nearly doubling the 17% return of the U.S. Market Index. This shift is also visible in ETF flows, where inflows into U.S. equities as a percentage of total inflows dropped below their historical average in the second quarter of 2025. Looming policy changes are creating additional headwinds for corporate profitability. Proposed caps on credit card interest rates, for instance, could lead to a significant decline in net income for major issuers. Furthermore, the implementation of new tariffs is expected to pressure profit margins as companies may be unable to pass the full cost on to consumers.
