On February 25, 2026, traders were active on the floor of the New York Stock Exchange (NYSE) in New York City, observing a troubling trend for U.S. equities. So far in 2026, foreign markets are significantly outperforming American stocks, driven by a softer dollar and more attractive valuations overseas.
The MSCI World ex-US index has risen approximately 8% this year, a stark contrast to the stagnation of the S&P 500. Notably, Japan's Nikkei 225 has surged by 17% year-to-date, while the Stoxx Europe 600 has grown by 7%, signaling investorsā increased preference for non-U.S. equities.
American stocks faced another challenging day on Friday as worries over the implications of expanding artificial intelligence and persistent domestic inflation weighed heavily on investor sentiment.
According to UBS strategist Andrew Garthwaite, a depreciating dollar represents a significant risk factor. UBS anticipates the euro will reach $1.22 by the end of the first quarter, highlighting what it describes as "asymmetric structural downside risks" for the dollar. Historically, a 10% drop in the dollarās trade-weighted index is linked with a 4% underperformance in U.S. equities in unhedged terms.
Garthwaite, who leads global equity strategy at UBS, has downgraded American equities to "benchmark" status within a fully invested global equity portfolio. He notes that underlying factors previously fueling U.S. markets' strong performance are beginning to wane.
One such diminishing factor is the strength of corporate buybacks, as explained by UBS. The U.S. buyback yield is now roughly equivalent to that of global peers, reducing its effectiveness as a driver of earnings per share growth and capital inflows. According to UBS, combined shareholder yield from dividends and buybacks in the U.S. is now about half that seen in Europe.
UBS also highlights concerns about current valuations. It calculates that the sector-adjusted price-earnings ratio for U.S. stocks is 35% above international peers, a notable increase from the historical average premium of about 4% since 2010. Additionally, around 60% of sectors are trading at higher multiples than their global counterparts and surpassing their historical premiums.
Political instability under President Donald Trump's administration adds another layer of uncertainty. This year has witnessed disruptions in tariff policy, movements to impose credit card interest rate caps, potential restrictions on private equity's involvement in housing, heightened attention to drug pricing, and proposals to limit dividends and buybacks for defense firms, UBS reports.
Despite these headwinds, Garthwaite stops short of turning completely bearish. He asserts that the U.S. economy and its stocks typically outperform during the early stages of potential market bubbles. UBS also predicts that the adoption of artificial intelligence in the U.S. will outpace most regions, except potentially China, contributing to sustained earnings growth across essential industries.
UBS strategist Sean Simonds has set a year-end target of 7,500 for the S&P 500, close to the 7,629 average target from 14 top strategists, as documented in CNBC Pro's strategist survey.