Multiple risks looming! UBS downgrades US stock market rating and no longer recommends investors to increase their holdings

UBS Global Chief Equity Strategist Andrew Garthwaite has downgraded the investment rating for the U.S. stock market, citing rising risks of a weaker dollar, high valuations, and increasing policy uncertainties in Washington. He has shifted the allocation to U.S. stocks in global equity portfolios from “overweight” to “neutral,” believing that the factors supporting years of outperformance are weakening.

Garthwaite pointed out that the outlook for the dollar is one of the main concerns. UBS expects the euro to rise to 1.22 USD by the end of the first quarter of next year and believes the dollar faces “structural downside risks.” Historical data shows that when the trade-weighted dollar index falls 10%, U.S. stocks typically underperform by about 4 percentage points if unhedged.

This year, as the dollar weakens and valuations in overseas markets become more attractive, there has been a noticeable rotation of funds. The MSCI All Country World ex-U.S. Index has risen about 8% cumulatively in 2026, while the S&P 500 has performed roughly flat. The Nikkei 225 index in Japan has gained 17% year-to-date, and the Europe Stoxx 600 has increased by 7%, indicating investors are accelerating their shift from U.S. stocks to international markets.

UBS also noted that the long-term support for U.S. stocks from corporate buybacks is weakening. Currently, the buyback yield of U.S. stocks is roughly on par with global peers, no longer offering a clear advantage, and the combined total shareholder return from dividends and buybacks in U.S. stocks is about half that of Europe. Meanwhile, UBS estimates that the forward P/E ratio of U.S. stocks, adjusted for industry, is 35% higher than the international market, well above the average premium of about 4% since 2010.

Policy uncertainties also add pressure. UBS mentioned high uncertainty around tariffs, proposals to cap credit card interest rates, restrictions on housing investments, drug pricing reviews, and discussions on dividend and buyback regulations for defense companies.

However, Garthwaite did not turn fully bearish. He stated that in the early stages of potential bubbles, the U.S. economy and stock market often have an advantage; at the same time, UBS expects the pace of AI application in the U.S. to remain ahead of most regions, helping to sustain corporate earnings growth.

UBS strategist Sean Simonds projects a year-end target for the S&P 500 at 7,500 points, slightly below the consensus forecast of 7,629 points among mainstream strategists.