Traders operate on the floor of the New York Stock Exchange on February 25, 2026, against a backdrop of global markets surpassing U.S. stocks this year. A weaker dollar alongside more appealing valuations is drawing capital abroad. The MSCI World ex-US index has climbed roughly 8% in 2026, contrasting with the flat performance of the S&P 500. Japan's Nikkei 225 surged 17% year to date, while Stoxx Europe 600 rose 7%, highlighting a clear shift away from U.S. equities. On Friday, U.S. stocks faced struggles as investors worried about the potential drawbacks of the artificial intelligence boom and persistent domestic inflation.
UBS forecasts the euro to reach $1.22 by the end of the first quarter, pointing to "asymmetric structural downside risks" for the U.S. dollar. Historically, a 10% drop in the dollar's trade-weighted index results in U.S. equities underperforming by about 4% in unhedged terms, according to the bank.
Andrew Garthwaite, head of global equity strategy at UBS, downgraded American equities to "benchmark" in a fully invested global equity portfolio, noting that the factors driving years of outperformance are starting to wane.
Another previously strong factor for U.S. stocks — corporate buybacks — is losing its effectiveness. The current buyback yield in the U.S. is approximately equal to global peers, reducing what was once crucial support for earnings per share growth and investor interest. UBS stated that the combined shareholder yield from dividends and buybacks in the U.S. is now about half that of Europe.
"The buyback yield is no longer exceptional, a key driver of funds flow, EPS, and valuation," Garthwaite explained.
Valuation concerns add to the unease, with the sector-adjusted price-earnings ratio for U.S. stocks standing at 35% above international peers, compared to an average premium of around 4% since 2010. Approximately 60% of sectors are trading at higher multiples than their global counterparts, as well as above their own historical premiums, according to Garthwaite.
Policy volatility under President Donald Trump presents additional challenges, with changes in tariff policy, proposals to cap credit card interest rates, potential restrictions on private equity housing investments, renewed drug pricing scrutiny, and suggestions to limit dividends and buybacks for defense companies.
Despite these concerns, Garthwaite remains cautious rather than bearish, noting that the U.S. economy and equities typically benefit more than peers during the early stages of a potential bubble. UBS also anticipates faster adoption of artificial intelligence in the U.S. compared to most other regions, except possibly China, which may help bolster earnings growth in key sectors.
UBS strategist Sean Simonds has set a year-end target of 7,500 for the S&P 500, aligning closely with an average forecast of 7,629 from 14 leading strategists, according to a CNBC Pro survey.