UBS downgrades the U.S. stock market. Here’s what has the investment bank worried

UBS’s top equity strategist withdrew his view on U.S. stocks, citing rising risks from a weakening dollar, stretched valuations and policy turmoil in Washington.

Andrew Garthwaite, the investment bank’s head of global equity strategy, downgraded American stocks to the “benchmark” level in a fully invested global equity portfolio, arguing that the factors that powered years of outperformance are beginning to fade.

Dollar risk is a central concern, Garthwaite wrote. UBS predicts the euro will rise to $1.22 by the end of the first quarter and sees “asymmetric structural downside risks” to the dollar. Historically, when the dollar’s trade-weighted index falls 10 percent, U.S. stocks underperform by about 4 percent in unhedged terms, according to the bank.

Foreign markets are outpacing the United States this year as the dollar weakens and cheap valuations draw capital abroad. The MSCI World ex-US index is up about 8%, compared with little changed performance in 2026. S&P 500. of japan Nikkei 225 It has increased by 17% to date. Stoxx Europe 600 It rose 7%, underlining a sharp move away from American stocks. US stocks suffered again on Friday as investors worried about the potential downside of artificial intelligence and ongoing inflation at home.

Corporate buybacks, another pillar of U.S. stock strength, are also losing their edge, the bank said. UBS said buyback yield in the U.S. is now only roughly on par with global peers, eroding what had been an important support for earnings per share growth and investor flows. Total shareholder return from dividends and buybacks in the US is now about half that in Europe, the bank said.

“The return on buybacks is no longer outstanding and has become a significant driver of fund flow, EPS and valuation,” Garthwaite wrote.

Valuations increase anxiety. UBS calculates that the industry-adjusted price-to-earnings ratio for US stocks is 35% above international peers; This rate has been around 4% on average since 2010. The strategist wrote that nearly 60% of sectors trade not only at higher multiples than their global counterparts, but also above their historical premiums.

Policy volatility under President Donald Trump is another headwind. UBS said this year brings changes to tariff policy, including proposed caps on credit card interest rates, potential limits on private equity investment in housing, renewed scrutiny of drug pricing and proposals to restrict dividends and buybacks for defense companies.

However, the famous strategist stopped short of entering the bearish trend. Garthwaite said the U.S. economy and stocks tend to benefit more than their peers when markets are in the early stages of a potential bubble. The bank also expects AI adoption to help drive earnings growth in key sectors, likely outpacing most other major regions, with the exception of China.

UBS strategist Sean Simonds set his year-end target for the S&P 500 at 7,500, while the average forecast of 14 top strategists was 7,629, according to CNBC Pro’s strategist survey.