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Here's why UBS has downgraded its rating on US equities to 'benchmark'UBS said it has downgraded the US to 'benchmark' in a 100% dedicated equity portfolio due to low operational leverage, the dollar risk, policy volatility, among other factors.By Shloka Badkar  February 28, 2026, 11:51:22 AM IST (Updated)4 Min ReadBrokerage firm UBS in its recent note downgraded its rating on US equities to 'benchmark' but its 'high-conviction overweight' recommendation continued to be emerging markets.

UBS said it has downgraded the US to 'benchmark' in a 100% dedicated equity portfolio due to low operational leverage, the dollar risk, policy volatility, among other factors.

Low operational leverage

UBS said the US has the lowest operational leverage of any major region. Hence, it historically underperforms if global growth accelerates to be above 3.5%.

The analyst has now forecast 3.4% global GDP in 2026, being above the Bloomberg consensus in Europe, US and Japan for the year.

Dollar risk

The analyst has forecast the euro vs dollar to be 1.22 by the end of the the first quarter of the calendar year 2026. It said it continues to see asymmetric structural downside risks to the dollar.

Historically, if the dollar falls 10%, the US underperforms around 4% in unhedged terms, the analyst said. In the past quarter, the uplift to US earnings from a weaker dollar was much less than normal, it added.

Buyback yield is no longer exceptional

UBS said the US' buyback yield is now only on par with global peers, this impacts funds flow, earnings per share and valuation. Hence, the total yield -- dividend + buybacks -- in the US is now half of Europe, whereas it used to be on par, it said

Valuation

The sector-adjusted price-to-earnings is 35% above peers, against a norm of 4% since 2010. Around 60% of the sectors are not only trading on a higher price-to-earnings ratio in the US than peers, but also at a higher ratio than their normal premium, UBS said.

Tech at benchmark

As much as 80% of the global tech market cap is in the US. Hence, 80% of the time tech outperforms, the US outperforms, it said.

Hyperscalers ave now underperformed year-to-day, but semis have outperformed by 5%, it said. UBS thinks this must be time-limited.

The capex-to-sales of the hyperscalers has now risen to 35% from 10% in 2022 and that is inconsistent with record margins, it said.

In many instances, the free-cash-flow after accounting for shareholder-based compensation is low, it added.

Other concerns on the remain -- Threats to growth of online advertising and the rise in memory prices might hit consumer electronic demand more than expected, UBS added.

Positioning

UBS said from its marketing in North America, it seems unambiguous that funds would go global as shown inside of ETF flows. UBS crowding data still shows the US to be most crowded market.

With the US at 63% of the MSCI AC World, then small amounts of switching go a long way.

ETF flows show diversification is happening, as 45% of the recent flows have gone into non-US equities, UBS said.

Policy volatility

The analyst said policy volatility and a potentially narrowing gap in corporate governance (to Japan and Korea) come on the back of this year, there being changes in tariffs, moves to potentially cap interest rates on credit cards and limiting the ability of price-to-earnings ratio to invest in housing, further risks to drug pricing and proposal to limit dividends/buybacks in defence companies

Risk of underperformance looks higher

UBS said it is not underweight on US equities as the risk of underperformance looks higher than outperformance.

The US has more of a symbiotic relationship between rising equities and rising GDP than elsewhere. UBS said it remains bullish on equities globally. As per the analysts calculations, 10% on US equities adds 1% to US GDP, which adds 4% to earnings per share.

It said while earnings revisions are still just better than the market and even by year-end earnings growth is 11% better than non-tech. It is wary of price-to-earnings ratios for tech, but they can't be entirely ignored.

The analyst also believes the US will adopt AI quicker than most other regions because of the flexibility of its labour market. However, UBS' European economists pointed that the cost saving is less than in Europe.

Continue ReadingFirst Published: Feb 28, 2026 11:49 AM ISTTagsglobal marketsUBSUS Stocks