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

Core Insights - Foreign markets are outperforming U.S. equities in 2026, with the MSCI World ex-US index gaining approximately 8% compared to a stagnant S&P 500 performance [2] - The dollar's weakness is a significant concern, with UBS predicting the euro to rise to $1.22 by the end of Q1, and historical data indicating that a 10% drop in the dollar's trade-weighted index leads to a 4% underperformance in U.S. equities [3] - UBS has downgraded American equities to "benchmark" status in a fully invested global equity portfolio, citing fading factors that previously supported U.S. stock outperformance [4] Market Dynamics - Corporate buybacks, a key driver of U.S. stock strength, are losing their effectiveness, with the buyback yield now comparable to global peers, which diminishes support for earnings per share growth [5] - The combined shareholder yield from dividends and buybacks in the U.S. is about half that of Europe, indicating a shift in capital flows [5] - The sector-adjusted price-to-earnings ratio for U.S. stocks is 35% above international peers, significantly higher than the average premium of 4% since 2010, with 60% of sectors trading at higher multiples than their global counterparts [6] Policy Environment - Policy volatility under the Trump administration presents additional challenges, including changes in tariff policies and scrutiny of corporate practices such as drug pricing and buybacks [7] - Despite these challenges, the U.S. economy and equities may benefit during the early phases of a potential market bubble, with expectations for artificial intelligence adoption to drive earnings growth across key industries [8] Market Projections - UBS strategist Sean Simonds has set a year-end target of 7,500 for the S&P 500, which is lower than the average forecast of 7,629 among top strategists [9]