UBS Downgrades U.S. Equities Over Dollar, Valuations
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- Andrew Garthwaite, head of global equity strategy at UBS, downgraded U.S. equities to 'benchmark' in a fully invested global equity portfolio, arguing the factors that powered years of U.S. outperformance are starting to fade.
- The dollar is UBS's central concern — the bank forecasts the euro climbing to $1.22 by end of Q1 and flags 'asymmetric structural downside risks' to the greenback, noting a 10% drop in the trade-weighted dollar historically drags U.S. equities 4% lower in unhedged terms.
- Corporate buybacks in the U.S. have lost their edge, with the buyback yield now roughly on par with global peers and the combined dividend-plus-buyback yield at about half that of Europe, eroding a key support for EPS growth and fund flows.
- U.S. valuations sit at extreme premiums: UBS calculates the sector-adjusted P/E is 35% above international peers versus a ~4% average premium since 2010, and roughly 60% of sectors trade above both global counterparts and their own historical premiums.
- Foreign markets are already trouncing the U.S. in 2026 — the MSCI World ex-US index is up ~8%, the Nikkei 225 has rallied 17% YTD, and the Stoxx Europe 600 is up 7%, while the S&P 500 is 'little changed.'
- Policy volatility under President Trump adds another headwind, with UBS citing tariff shifts, proposed credit card interest rate caps, potential limits on PE housing investment, drug-pricing scrutiny, and suggestions to curb dividends and buybacks for defense companies.
- UBS strategist Sean Simonds set a year-end S&P 500 target of 7,500, slightly below the 7,629 average forecast among 14 top strategists in CNBC Pro's survey.
Why it matters: UBS's call matters because the bank isn't identifying one headwind — it's flagging that every pillar of U.S. outperformance is weakening at once: a 35% valuation premium versus a historical 4%, a dollar forecast that would historically cost 4% in unhedged returns, and a buyback yield that no longer stands out. Investors who've been overweight U.S. now face the rebalancing question — and the rotation is already visible, with the MSCI World ex-US up ~8% in 2026 versus a flat S&P 500.
