UBS dropped its recommendation to buy U.S. stocks. What worries the bank?

UBS has revised its position on the U.S. market, pointing out the growing risks associated with a weakening dollar, inflated asset valuations and political turbulence, CNBC reports. The investment bank no longer recommends favoring U.S. stocks in a portfolio, but advised keeping their exposure to a benchmark index such as MSCI World. The factors that provided their years of outperformance are starting to weaken, UBS warned.

UBS Chief Equity Strategist Andrew Garthwaite has downgraded U.S. equities, downgrading them from "above market" (overweight) to neutral (benchmark) in the global portfolio. According to the Swiss investment bank, the key problem with U.S. assets is "asymmetric structural downside risks" to the dollar. UBS forecasts the euro to strengthen to $1.22 by the end of the first quarter. Historical data shows that during periods when the trade-weighted dollar index is down 10 percent, U.S. stocks on average lag foreign markets by about four percentage points if investors don't hedge against currency risk, the bank notes.

Foreign markets are significantly outperforming U.S. markets this year as a weaker dollar and lower stock valuations attract capital outside the U.S., CNBC explains. The MSCI World ex-US index has added about 8% since the start of 2026, while the S&P 500 is virtually unchanged. Japan's Nikkei 225 is up 17% and the Stoxx Europe 600 is up 7%.

The US stock market came under renewed pressure on Friday amid investor concerns about the negative effects of investing in artificial intelligence and sustained inflation.

Another factor that used to support U.S. securities but is now losing strength is share buyback programs, UBS said in a note. Buyback yields in the U.S. are now only roughly comparable to global peers, undermining one of the key drivers of EPS growth and fund inflows, Garthwaite warns. The combined return to shareholders through dividends and buybacks in the US is now about half that in Europe, UBS emphasizes. According to Barclays, the companies that make up the Stoxx Europe 600, announced in January-February on share buyback programs for €85.7 billion - a record volume for this period, Bloomberg reports.

Garthwaite is also concerned about stock valuations. According to UBS calculations, even taking into account differences in the structure of industries represented in the U.S. and European equity markets, the price-to-earnings ratio for U.S. stocks is 35% higher than that of their foreign peers. By comparison, the average premium has been about 4% since 2010. About 60% of sectors are trading not only at higher multiples than global peers, but also above their own historical premium, the strategist noted.

Political volatility under President Donald Trump remains an additional headwind for U.S. equities, the bank said. This year has already seen changes in trade policy, proposals to limit credit card rates, possible restrictions on private investment in housing, increased pressure on drug prices, and discussed measures to limit dividends and share buybacks for defense companies, UBS points out.

The U.S. economy and stock market tend to benefit more than others in the early phases of a potential bubble, Garthwaite said. The bank expects AI adoption in the U.S. to outpace most other major regions, with the possible exception of China, which will help support profit growth in key industries.

UBS strategist Sean Simonds set his year-end target for the S&P 500 at 7,500 points, expecting the broad market index to rise about 9.5%. By comparison, the consensus forecast of 14 top strategists is 7,629 points, according to a CNBC poll.

This article was AI-translated and verified by a human editor