UBS downgrades US stocks, warns of triple pressure from the US dollar, valuations, and Trump policies.

Wall Street mainstream institutions' confidence in the long-term excess returns of the US stock market has been shaken, and UBS has downgraded its rating of US stocks to neutral. UBS's global stock strategy chief Andrew Garthwaite and his team released a report on Friday, the 27th, downgrading the rating of US stocks in a 100% stock portfolio to "benchmark," which is a neutral allocation, while maintaining an overweight rating for emerging market stocks. In the report, Garthwaite pointed out, "In USD terms, the drawdown of the US market relative to the global market is the largest in nearly fifteen years," indicating that even in the background of the rise of artificial intelligence (AI), better-than-expected US economic growth, and the Trump administration rolling back some tariffs, this situation has not been reversed. The direct implication of this downgrade is that UBS believes the risk of US stocks underperforming the global market is higher than the likelihood of outperformance. From the perspective of fund flows, UBS strategists have indicated that communication with North American clients suggests "funds will significantly move towards global markets," and ETF fund flow data confirms this trend - with 45% of funds flowing into markets outside the US in recent times. The weak dollar is a core concern, with external markets accelerating inflows The depreciation of the US dollar is one of the core logics of UBS's downgrade. UBS predicts that the euro will rise to 1.22 against the US dollar by the end of the first quarter, and explicitly states that the US dollar faces "asymmetrical structural downside risks." Historical data shows that when the US dollar trade-weighted index falls by 10%, US stocks relative to the global market, on an unhedged basis, will lag behind by about 4%. It is worth noting that the weakening of the US dollar is also dampening the boost effect on US corporate earnings. UBS points out that in the past quarter, the boost to US corporate earnings from the depreciation of the US dollar has been "far below normal levels," further weakening the logic of earnings growth that previously supported the valuation of US stocks. Meanwhile, overseas markets have shown strong performance this year, in stark contrast. The MSCI All-Country World (excluding US) Index has risen by about 8% year-to-date, the Nikkei 225 Index by about 17%, the STOXX 600 Index by about 7%, while the S&P 500 Index has performed almost flat during the same period. Capital is accelerating its flow into overseas markets with lower valuations and smaller US dollar exposures. Buyback advantages diminishing, valuation premiums hard to sustain Corporate buybacks, once a key support for US stocks, are losing their allure. UBS points out that the US stock buyback yield is currently only on par with global peers, and even lower than the UK market, which directly affects fund flows, earnings growth per share, and valuation levels. Garthwaite bluntly stated in the report, "(The US stock) buyback yield is no longer exceptionally high, which was a key DRIVER driving fund inflows, earnings per share, and valuation increases." Pressure on valuation levels is also not to be underestimated. UBS estimates that after industry structure adjustments, the US stock market's price-to-earnings ratio is about 35% higher than similar international markets, while the historical average premium since 2010 has been around 4%. In addition, about 60% of industry sectors not only have higher valuations relative to global peers but their premium levels also exceed their historical averages. The total shareholder return from dividends and buybacks in US stocks is currently about half that of Europe, further undermining their relative attractiveness. Exacerbated policy uncertainties, bearish but not pessimistic The high degree of uncertainty in the Trump administration's policies is another layer of suppression. UBS listed policy disruptions this year including: fluctuating tariff policies, proposed setting of credit card interest rate caps, plans to restrict private equity investment in the housing market, restarting drug pricing reviews, and proposing restrictions on defense companies distributing dividends and buybacks, etc. However, Garthwaite explicitly stated that they are not yet completely bearish. He believes that in the early stages of a potential bubble, the US economy and stock market typically can still benefit from it. UBS also expects that the adoption of AI in the US will outpace most other major regions (with the exception of China), helping to support growth in key industries. From a forecast perspective, UBS strategist Sean Simonds has set a year-end target for the S&P 500 Index at 7500 points, lower than the average forecast of 7629 points by 14 top strategists as reported by CNBC Pro. UBS also forecasts global GDP growth of 3.4% in 2026 and points out that the US is the market with the lowest operating leverage among major regions, with the US stock market historically often underperforming global peer markets if global economic growth accelerates beyond 3.5%. Nevertheless, since US stocks account for over 70% of the MSCI Global Index, UBS's neutral allocation recommendation still implies a significant position in US stocks in absolute terms. This article is sourced from Wall Street See, authored by Li Dan; translated and edited by GMTEight.