Wall Street’s confidence in the long-term excess returns of U.S. stocks seems to be undergoing a subtle shift. Recently, UBS Group AG released a report downgrading its rating of U.S. equities from “Overweight” to “Neutral”—aligning with a benchmark allocation—while maintaining an “Overweight” recommendation for emerging market stocks.
In the report, the team led by Andrew Garthwaite, Head of Global Equity Strategy at UBS, pointed out that in U.S. dollar terms, the current drawdown of the U.S. market relative to the rest of the world has reached its widest level in nearly fifteen years. Notably, this weakness in U.S. stocks has persisted despite the surge in artificial intelligence enthusiasm, stronger-than-expected U.S. economic growth, and the rollback of certain tariff policies. Garthwaite stated plainly that currently, the risk of U.S. stocks underperforming the global market is higher than the probability of them outperforming.
One of the core logics behind this rating adjustment lies in concerns over the trajectory of the U.S. dollar. The team of UBS strategists forecasts that the euro will appreciate to $1.22 against the U.S. dollar by the end of the first quarter and explicitly pointed out that the dollar is facing “asymmetric structural downside risks.” Historical experience suggests that when the dollar’s trade-weighted index falls by 10%, the performance of unhedged U.S. stocks lags behind the global market by approximately 4%. More worryingly, over the past quarter, the positive impact of a weaker dollar on U.S. corporate earnings has been “far below normal levels,” further undermining the earnings growth logic that had previously supported high valuations in the U.S. market.
Meanwhile, other major global markets are showing strong appeal. Corporate buybacks, once a significant support for U.S. stocks, no longer hold the same advantage. UBS noted that the current buyback yield of U.S. stocks is no longer exceptionally prominent; it is not only on par with the global average but even lower than that of the UK market. Garthwaite believes that the decline in buyback yields directly impacts fund inflows, earnings per share growth, and valuation levels—factors that were once key drivers of the U.S. stock market rally.
Pressure on valuations is also a factor that cannot be ignored. According to UBS calculations, after adjusting for sector composition, the price-to-earnings ratio of U.S. stocks is approximately 35% higher than that of comparable international markets, whereas the historical average premium since 2010 has been only about 4%. Furthermore, around 60% of U.S. industry sectors are not only valued higher than their global peers but also trade at premiums exceeding their own historical averages. From a shareholder return perspective, the current total return from dividends and buybacks in the U.S. stock market is roughly only half of that in Europe, significantly diminishing its relative appeal.
Policy uncertainty also casts a shadow over the outlook for U.S. stocks. UBS listed a series of policy disruptions from the Trump administration since the start of the year, including fluctuating tariff policies, proposals to cap credit card interest rates, plans to restrict private equity from entering the housing market, the re-launch of drug pricing reviews, and limitations on dividends and buybacks for defense companies.
Despite these factors, UBS has not turned entirely bearish. Garthwaite suggested that in the early stages of a potential bubble, the U.S. economy and stock market can usually still benefit. Given that U.S. stocks account for over 70% of the MSCI All-Country World Index, UBS’s “Neutral” allocation recommendation still implies a fairly substantial position in absolute terms.
