UBS downgrades US stock market
Adding to market anxiety, UBS has downgraded its outlook for the U.S. stock market. The bank warned that key drivers like corporate buybacks are fading and pointed to "asymmetric structural downside risks" for the U.S. dollar amid growing geopolitical instability.
The downgrade reflects a notable valuation gap, with U.S. stocks trading at a 35% premium to their global counterparts, significantly higher than the average 4% premium seen since 2010. This stretched valuation comes as the S&P 500 has remained relatively flat, while international markets have surged ahead. The MSCI World ex-USA Index, for instance, has gained about 8% year-to-date. A key pillar of the long-standing U.S. market outperformance, corporate share buybacks, is showing signs of weakening. While buybacks are projected to increase in 2026 compared to 2025, they are expected to remain below the record levels of 2024. The buyback yield for U.S. stocks is now considered to be on par with global peers, diminishing a significant advantage that once drove U.S. earnings-per-share growth. The U.S. dollar is facing what UBS terms "asymmetric structural downside risks." The bank forecasts the euro to climb to $1.22. A weakening dollar has historically led to U.S. stocks underperforming global markets. For every 10% drop in the dollar's trade-weighted index, U.S. equities have typically lagged foreign markets by about 4%. Heightened geopolitical instability and domestic policy uncertainty are further pressuring the dollar and market sentiment. Ongoing tariff discussions and their potential impact on trade balances contribute to market volatility. Tensions related to Iran have also added to a risk-averse environment, making the U.S. dollar's traditional "safe haven" status less certain. This has led some institutional investors to begin shifting new allocations to overseas markets.
