UBS Downgrades US Stock Market
Global investment bank UBS has downgraded its outlook on U.S. equities, citing multiple concerns. The bank pointed to the fading impact of corporate buybacks, increasing structural risks to the U.S. dollar, and the potential for significant downside from further geopolitical or economic shocks.
The downgrade, from "Overweight" to "Neutral," was issued by Andrew Garthwaite, UBS's Head of Global Equity Strategy. A key catalyst was a surprise surge in the January Producer Price Index, which revealed a 0.8% monthly rise in the core rate, challenging the prevailing "soft landing" narrative for the economy. U.S. stocks are trading at a significant premium to global markets. Price-to-earnings ratios in the United States, when adjusted by sector, stand approximately 35% above their international peers, a level well beyond long-term norms. The advantage U.S. stocks held from corporate buybacks has diminished. The "buyback yield" for American companies has now fallen to a level that is on par with the rest of the world, neutralizing a previously significant driver of U.S. earnings-per-share growth. Regarding currency risks, UBS strategists forecast the euro will strengthen against the dollar, targeting a EUR/USD rate of 1.22. The bank noted that the positive impact of a weaker dollar on the overseas earnings of U.S. companies has been significantly less pronounced than in previous cycles. This shift coincides with observable changes in capital allocation. While the S&P 500 has remained largely flat year-to-date, the Nikkei 225 has gained about 17% and the Stoxx Europe 600 has risen roughly 7%. ETF flow data indicates a significant portion of capital is now moving into regions outside the U.S. UBS also highlighted increasing policy uncertainty in Washington. The bank cited frequent adjustments on issues like tariffs, proposed caps on credit card interest rates, and reviews of drug pricing as creating instability for corporate earnings expectations. The bank's strategists forecast global GDP will grow by 3.4% in 2026. Historically, U.S. stocks have underperformed in comparison to global markets when global economic growth accelerates to rates above 3.5%. In response, UBS has upgraded its recommendation for emerging market equities to "overweight".
