UBS Downgrades US Stock Market. Here’s what worries investment banks

UBS’s top equity strategist dialed back his outlook on US 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 equities to “benchmark” in its fully invested global equity portfolio, arguing that the factors behind years of outperformance were starting to fade.

Dollar risk is a central concern, Garthwaite wrote. UBS forecasts the euro will rise to $1.22 by the end of the first quarter and sees “asymmetric structural downside risks” to the greenback. Historically, when a trade-weighted index of the dollar has fallen 10%, US stocks have fallen roughly 4% in unhedged terms, according to the bank.

Foreign markets have been battered by the US this year as a weaker dollar and cheaper valuations draw capital abroad. The MSCI World ex-US index has gained nearly 8% in 2026, compared with a little-changed performance. S&P 500. of Japan Nikki 225 17% year to date combined, but the Stocks Europe 600 Up 7%, underscoring the sharp turnaround from American stocks. US stocks struggled again on Friday as investors fretted over the potential downsides of artificial intelligence build-out and persistent inflation at home.

Another pillar of US stock strength – corporate buybacks – is losing its edge, the bank said. Repurchase yields in the US are now roughly on par with global peers, eroding key support for earnings per share growth and investor flows, UBS said. The bank said the combined shareholder yield from dividends and buybacks in the US is now half that of Europe.

“Buyback yields are no longer exceptional and are a key driver of fund flow, EPS and valuation,” Garthwaite wrote.

Assessments increase anxiety. UBS calculates that the sector-adjusted price-earnings ratio for US stocks is 35% higher than international peers, versus an average premium of about 4% since 2010. Roughly 60% of sectors trade not only at higher multiples than their global counterparts but also at higher than their own historical premium, the strategists wrote.

Policy volatility under President Donald Trump is another headache. This year has brought changes in tariff policy, proposals to cap credit card interest rates, potential limits on private equity investment in housing, renewed scrutiny of drug prices and suggestions for defense companies to curb dividends and buybacks, UBS said.

However, the renowned technician stopped short of being a bear altogether. Garthwaite said the US economy and stocks will benefit more than peers when markets are in the early stages of a potential bubble. The bank expects the adoption of artificial intelligence to help sustain earnings growth in key industries, with the exception of China, outpacing other key regions.

UBS strategist Sean Simonds had a year-end target of 7,500 for the S&P 500, compared with an average forecast of 7,629 among 14 top strategists, according to CNBC Pro’s Strategist Survey.