UBS strategist downgrades US stocks: Weakening dollar + high valuations + White House antics!

UBS Chief Equity Strategist Lowers U.S. Stock Outlook Due to Rising Risks of Dollar Weakening, Overvaluation, and Washington Policy Turmoil

UBS Global Equity Strategist Andrew Garthwaite has downgraded the U.S. stock rating in the global equity portfolio to “benchmark.” He believes that the factors driving U.S. stocks to outperform the global market over the past years are gradually diminishing.

Garthwaite pointed out that the risk of the dollar is a core concern. According to the bank’s forecast, the euro against the dollar will rise to 1.22 by the end of the first quarter, and he considers the dollar faces “structural, asymmetric downside risks.”

Historical data shows that when the trade-weighted dollar index falls by 10%, U.S. stocks tend to underperform global stocks by about 4% on average if unhedged. This year, with the dollar weakening and foreign markets being cheaper in valuation, capital is flowing out of the U.S., and non-U.S. markets are significantly outperforming.

Since the beginning of the year, the MSCI World (excluding the U.S.) index has risen about 8%, the Nikkei 225 has gained 17%, and the Stoxx Europe 600 has increased 7%. The S&P 500 has nearly stagnated, highlighting a clear rotation of funds out of U.S. stocks.

Meanwhile, concerns over potential risks from the artificial intelligence investment boom and ongoing domestic inflation pressures have pressured U.S. stocks again on Friday.

UBS also stated that one of the key supports for U.S. stocks—corporate buybacks—is losing its advantage. Currently, the buyback yield in the U.S. is roughly on par with global peers, weakening its support for EPS growth and capital inflows.

The bank noted that the “shareholder return yield” from dividends and buybacks in the U.S. is now only about half of Europe’s. Garthwaite wrote, “Buyback yields are no longer prominent; they used to be a major driver of capital flows, EPS growth, and market cap increases.”

Overvaluation has intensified this unease. UBS estimates that the forward P/E ratio of U.S. stocks, adjusted by industry, is 35% higher than the international peers, compared to an average premium of only about 4% since 2010. About 60% of industries are valued higher than their global benchmarks and above their own historical premium levels.

UBS pointed out that policy volatility under the Trump administration also poses headwinds. This year, the U.S. has seen frequent changes in tariffs, credit card interest rate caps, restrictions on private equity investments in the housing market, re-evaluation of drug pricing, and proposals to limit dividends and buybacks by defense companies.

However, the strategist did not turn completely bearish. Garthwaite stated that during the early stages of a potential bubble, the U.S. economy and stock market often benefit more than other markets.

Additionally, UBS expects the pace of AI application in the U.S. to outstrip most major regions, supporting earnings growth in key industries. UBS strategist Sean Simonds set the year-end target for the S&P 500 at 7,500 points.

(Source: Cailian Press)