UBS Strategists Downgrade U.S. Stock Outlook: Weakening Dollar, High Valuations, and Washington Turmoil

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UBS’s Chief Equity Strategist has lowered its outlook for U.S. stocks, citing risks related to a weakening dollar, overvalued stock markets, and increasing uncertainty due to policy turmoil in Washington.

Andrew Garthwaite, the Global Head of Equity Strategy at UBS, downgraded the rating of U.S. stocks in global equity portfolios to “Benchmark.” He believes that the factors that have driven U.S. stocks to outperform global markets in recent years are gradually fading.

Garthwaite points out that the risk associated with the dollar is the core concern. According to UBS’s forecast, the euro-to-dollar exchange rate will rise to 1.22 by the end of the first quarter and the dollar is facing “structural, asymmetric downside risks.”

Historical data shows that when the trade-weighted dollar index drops by 10%, U.S. stocks, on average, underperform global equities by about 4% if not hedged. This year, with the dollar weakening and foreign markets offering cheaper valuations, funds have been flowing out of the U.S., leading non-U.S. equities to significantly outperform.

So far this year, the MSCI World Index (excluding the U.S.) has risen about 8%, the Nikkei 225 Index has surged 17%, and the Stoxx Europe 600 Index has gained 7%. Meanwhile, the S&P 500 Index has remained flat, highlighting the clear rotation of funds away from U.S. stocks.

At the same time, investor concerns about the potential risks of the artificial intelligence investment boom, along with continued inflationary pressure in the U.S., have put further pressure on U.S. stocks.

UBS also pointed out that one of the key factors supporting U.S. stocks—share buybacks—is losing its strength. Currently, the buyback yield in the U.S. is roughly in line with global peers, weakening its support for earnings per share growth and capital inflows.

The bank stated that the combined “shareholder return yield” of dividends and buybacks in the U.S. is now only about half of Europe’s. Garthwaite wrote: “Buyback yields are no longer exceptional. They were once an important driver of fund flows, EPS growth, and market capitalization growth.”

Valuations being too high have exacerbated this unease. UBS calculates that the price-to-earnings ratio of U.S. stocks, adjusted by sector, is 35% higher than that of international peers, while the average premium since 2010 was only about 4%. Approximately 60% of industries are not only valued higher than global benchmarks, but also above their own historical premium levels.

UBS also noted that policy volatility under the Trump administration poses additional headwinds. This year alone, the U.S. has seen frequent changes in policies related to tariffs, credit card interest rate caps, restrictions on private equity investments in the housing market, reevaluation of drug pricing, and proposed limits on defense sector dividends and buybacks.

However, the strategist is not entirely bearish. Garthwaite emphasized that when markets are in the early stages of a potential bubble, the U.S. economy and stock market often benefit more than other markets.

Furthermore, UBS expects the advancement of artificial intelligence applications in the U.S. to outpace most other major regions, supporting earnings growth in key industries. UBS strategist Sean Simonds set a year-end target of 7500 points for the S&P 500 Index.

Following Google, Microsoft Faces Antitrust Scrutiny: Japan’s Antitrust Storm Intensifies, Cloud Business Under Compliance Scrutiny

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Japan’s antitrust regulator, the Japan Fair Trade Commission (JFTC), launched a surprise on-site inspection at Microsoft Japan’s headquarters on February 25.

According to sources familiar with the matter, the inspection primarily focuses on investigating whether Microsoft has been improperly promoting its Azure cloud platform by leveraging its dominant position in the operating system and office software markets. The JFTC suspects that Microsoft has set unfair licensing terms, making it more costly or technically challenging for customers to run Windows Server or Microsoft 365 software on third-party platforms like Amazon Web Services (AWS) or Google Cloud, compared to using Azure.

A spokesperson for the JFTC declined to comment. A representative from Microsoft Japan issued a statement confirming that the company is fully cooperating with the JFTC’s investigation.

This intervention by Japan’s antitrust regulator is no accident, as it reflects the growing global trend of scrutinizing anti-competitive practices by major tech giants. Microsoft is currently in a fierce global competition with Amazon (NASDAQ:AMZN) and Google (NASDAQ:GOOGL) in the cloud services and AI sectors, all three of which view Japan as a key market. Japan, home to many large corporate groups and banks, has been a major target for these companies, which have invested significant resources to ensure leadership in the region.

Regulators are concerned that if Microsoft uses its software licensing advantages to effectively force users to commit to Azure services, it could seriously harm competition in the cloud market and increase the long-term costs of digital transformation for businesses. As a result, Japan’s antitrust regulators are taking increasingly tough measures to curb what they perceive as the monopolistic expansion of major American tech companies, aligning with positions taken by regulators in other countries.

Japan’s move follows similar scrutiny by the European Union and the United States on bundling practices, and signals a growing consensus among major global economies to ensure fair access to cloud infrastructure. Notably, last year, the JFTC issued a cease-and-desist order against Google, accusing the Android software provider of requiring business partners to prioritize its smartphone apps, which was deemed to abuse its market dominance.

With the rapid growth of generative AI, the cloud services market is expected to expand significantly, as this technology heavily depends on high-performance server clusters. While Japan has local data center operators (with the government supporting these companies to strengthen national cybersecurity), much like other countries worldwide, its domestic cloud market remains dominated by American providers.

Research firm IDC forecasts that Japan’s cloud computing market will reach ¥19 trillion (approximately $121 billion) by 2029, nearly double its size in 2024. Meanwhile, the JFTC has made it clear that it aims to ensure a fair and orderly competitive environment during this crucial window period, when market demand is set to surge.