UBS Downgrades US Stock Ratings, Warning of Triple Pressure from the Dollar, Valuations, and Trump's Policies

Mainstream Wall Street institutions are losing confidence in the US stock market’s long-term excess returns, with UBS downgrading its rating on US stocks to Neutral.

UBS Global Equity Strategist Andrew Garthwaite and his team released a report on Friday, the 27th, downgrading the allocation rating of US stocks in a 100% equity portfolio to “Benchmark,” i.e., neutral, while maintaining an overweight position in emerging market stocks.

Garthwaite pointed out in the report, “In dollar terms, the US market has experienced its largest drawdown relative to the global market in nearly fifteen years,” even amid the rise of artificial intelligence (AI), better-than-expected US economic growth, and the Trump administration pulling back some tariffs. This situation has not reversed.

The direct market implication of this downgrade is that UBS believes the risk of US stocks underperforming the global market now exceeds the chance of outperforming. Regarding capital flows, UBS strategists noted that conversations with North American clients indicate “funds will clearly shift toward global markets,” and ETF fund flow data confirms this trend—recently, 45% of funds have flowed into markets outside the US.

A weakening dollar is a core concern, with external markets accelerating capital inflows

A decline in the dollar is one of the key reasons behind UBS’s downgrade. UBS forecasts the euro to dollar exchange rate will rise to 1.22 by the end of Q1, explicitly stating that the dollar faces “asymmetric structural downside risks.”

Historical data shows that when the trade-weighted dollar index falls 10%, US stocks underperform global markets by about 4% on an unhedged basis.

It is also noteworthy that the positive impact of a weaker dollar on US corporate earnings is diminishing. UBS pointed out that in the past quarter, the dollar’s depreciation contributed “far less than normal” to US corporate profits, further weakening the earnings growth logic that previously supported US stock valuations.

Meanwhile, overseas markets have performed strongly this year, forming a stark contrast. The MSCI All Country World ex-USA index has gained about 8% year-to-date, the Nikkei 225 index about 17%, the Stoxx 600 index about 7%, while the S&P 500 has nearly flatlined. Capital is accelerating into overseas markets with lower valuations and less dollar exposure.

Buyback advantages are fading, making valuation premiums unsustainable

Share repurchases, once a major pillar of US stock support, are losing their appeal.

UBS noted that the current yield from US buybacks is only on par with global peers, even lower than the UK market. This change directly affects capital flows, earnings per share growth, and valuation levels. Garthwaite stated in the report:

“(US) buyback yields are no longer abnormally high, which was previously a key driver of capital inflows, EPS growth, and valuation increases.”

Valuation pressures are also significant.

UBS estimates that, after industry restructuring, the US P/E ratio trades at a roughly 35% premium over similar international markets, compared to a historical average premium of about 4% since 2010. Additionally, about 60% of industry sectors are valued higher relative to their global peers, with premiums exceeding their historical averages. The combined dividend and buyback shareholder returns in US stocks are currently about half of Europe’s, further weakening their relative attractiveness.

Policy uncertainty intensifies, bearish but not yet pessimistic

The high uncertainty surrounding policies from the Trump administration adds another layer of pressure. UBS listed recent policy disruptions this year, including: repeated adjustments to tariffs, proposals to set credit card interest rate caps, plans to restrict private equity investments in the housing market, reinitiating drug pricing reviews, and proposals to limit defense companies’ dividend and buyback distributions.

However, Garthwaite explicitly states that the outlook has not turned fully bearish. He believes that in the early stages of potential bubbles, the US economy and stock market can still benefit.

UBS also expects that the adoption rate of AI in the US will outpace most other major regions (with China as an exception), supporting earnings growth in key industries.

According to forecast data, UBS strategist Sean Simonds set the year-end target for the S&P 500 at 7,500 points, below the average forecast of 7,629 points from 14 top strategists surveyed by CNBC Pro.

UBS also predicts that global GDP growth will be 3.4% in 2026, noting that the US has the lowest operating leverage among major regions. If global economic growth accelerates beyond 3.5%, US stocks have historically tended to underperform their global peers.

Nevertheless, since US stocks account for over 70% of the MSCI World Index, UBS’s neutral allocation still implies a substantial US equity position in absolute terms.

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