After decades of outclassing the competition, the U.S. stock market may soon lose its edge. According to Andrew Garthwaite, UBS Group‘s head of global equity strategy, American stocks are expected to perform at “benchmark” in the bank’s global portfolio. The investment bank cites three key forces converging at once.
The pillars are cracking
Over the last few decades, U.S. equities have enjoyed some structural advantages that UBS sees waning:
- Start with the dollar. UBS sees the dollar weakening against global currencies. A strong dollar has historically been linked to U.S. stock performance. The reverse is also true: When the dollar’s trade-weighted index falls by 10%, U.S. stocks have historically underperformed by about 4%.
- Second, buybacks. For years, U.S. companies distinguished themselves by aggressively repurchasing shares — juicing earnings per share and attracting international capital. But global peers have caught on, and the combined shareholder yield from dividends and buybacks in the U.S. is now roughly half that of Europe. That’s a big gap.
- And finally, valuations. UBS calculates that the industry-adjusted P/E ratio for U.S. stocks is 35% above that of international peers. That premium was just 4% in 2010. Some of that spread reflects the incredible earnings growth of U.S. firms, but a nearly ninefold increase in 16 years raises a few red flags.
Image source: Getty Images.
Now, to be clear, UBS itself hasn’t turned bearish on the U.S. stock market. Analyst Sean Simonds has a year-end S&P 500 (^GSPC 0.76%) target of 7,500 — though, to be fair, some substantial developments in global affairs have happened since the target was set. The analysis still sees U.S. companies remaining the global leaders in artificial intelligence (AI), which it believes could sustain earnings growth for years.
What makes this moment different
But the analysis also points out that the impacts of the current administration’s agenda — trade tariffs, proposed caps on credit card rates, limits on private equity in housing, drug pricing scrutiny, and direct government equity investments in private companies — create an environment that businesses cannot easily model. And predicting the future, at least to a reasonable degree, is essential in running a business.
When companies can’t plan, they pull back on investment. And when they pull back, the earnings growth that justifies premium valuations starts to erode.
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Layer that on top of a historically valued stock market — the Schiller CAPE ratio is more than double its long-term median, and in territory only reached at the peak of the dot-com bubble and for a brief moment in the wake of the pandemic — and you get a precarious situation.
What this means for your portfolio
Let me be clear. None of this means you should panic sell. Timing the market is a loser’s game, and staying invested over the long term has consistently outperformed every other approach.
But this is a good moment to stress-test your holdings. If you’re heavily concentrated in U.S. equities — especially in the AI-adjacent megacaps that have driven so much of the recent gains — I would look to balance these out with international stocks disconnected from the AI trade. The era of effortless U.S. market dominance may not be over, but it’s getting harder to maintain.