The market currently assigns only a 20% probability to bubble pricing, while UBS analysts believe that the actual probability of being in a bubble may exceed 80%.
The U.S. stock market may first experience a surge of over 20%, followed by a sharp decline as the bubble bursts; the U.S. 10-year Treasury yield, seen as a "safe haven," may break 5%, disrupting the balance of traditional investment portfolios; meanwhile, the once-prominent tech stocks may significantly underperform, while the long-dormant pharmaceutical sector may rise unexpectedly.
On February 2, 2026, UBS's global equity strategy team released its annual risk scenario report titled "Top 10 Surprises of 2026," which presents a disruptive challenge to market consensus.
1. Origin of the Report
● The report released by UBS's global equity strategy team on February 2 is not its traditional benchmark forecast, but rather a systematic stress test of key areas where market consensus and its own core views may be wrong.
● The core warning of this report is: Market consensus may severely underestimate tail risks and the speed of style rotation.
● Looking back at 2025, the market consensus was proven "very wrong" in several key areas, including the "American exceptionalism" narrative, the performance of Chinese stocks, the trend of the U.S. dollar, and the disruptive impact of artificial intelligence on industries like software. Based on this, the UBS team believes it is necessary to examine the risk scenarios that could disrupt investor expectations for 2026 in advance.
2. Market Bubble: The Cycle from Euphoria to Collapse
The most striking prediction in the UBS report is the potential for a "rise followed by collapse" rollercoaster in the U.S. stock market.
● Although UBS's core view sets the year-end target for the MSCI AC World Index at 1130 points, representing about an 8% upside, the risk scenario indicates that the market may experience a "melt-up" followed by a "melt-down."
● The report points out that since last December, all seven prerequisites for forming a bubble have been met: stocks have significantly outperformed bonds over the long term, the narrative of "this time is different," 25 years since the last bubble, overall profit margins under pressure, market concentration, retail investors continuously buying in, and loose monetary conditions.
● The market currently assigns only a 20% probability to bubble pricing, but UBS believes this probability could rise to over 80%, suggesting that the stock market may still have about 20% upside potential.
● More critically, the fundamental reasons for this round of bubbles are more compelling than before. UBS notes that generative AI may break the "Amara's Law," with U.S. quarterly productivity growth soaring to 4.9%. The report estimates that if productivity improves by 2% starting in 2028, the fair value of the S&P 500 index will reach 8600 points, representing about a 24% upside from current levels.
● Another major risk is the monetization of government debt. The U.S. federal deficit accounts for 4.2% of GDP, and government debt accounts for 125.1% of GDP, far exceeding the levels during the TMT bubble.
However, UBS emphasizes that we are far from the peak of the bubble, as none of the seven warning signals of a bubble peak have appeared. Possible triggers for the eventual bubble burst include excessive investment in the tech sector leading to a collapse in profit margins and rising bond yields due to concerns over fiscal discipline.
3. Interest Rate Risk: U.S. Treasury Yields May Exceed 5%
● The second key warning in the UBS report involves the potential for a sovereign debt crisis to push U.S. 10-year Treasury yields above previous highs. UBS's core view is that the yield on U.S. 10-year Treasuries will fall back to 4% by year-end, but in the risk scenario, yields could exceed the previous cycle's high of 5.04%.
● The report warns that the government may "spend until it collapses." In the past two years, the vast majority of incumbent governments in developed markets have lost elections or majority seats. Many commentators attribute this to stagnation in per capita GDP growth since 2018.
● A short-term expedient may be for the government to engage in massive spending. In the U.S., President Trump proposed a series of spending plans, including a $2000 tax cut per person. More concerning is that this occurs at a time when fiscal conditions are already very tight. The U.S. needs an initial budget surplus of 1.52% to stabilize its debt, but the actual deficit is -4.2%, with a gap of 3.4%.
● UBS suggests that if this situation occurs, investors should avoid highly leveraged stocks and focus on local stocks in regions with strong fiscal conditions, such as Switzerland and Taiwan, while gold will become a hedge against debt monetization.
4. Sector Rotation: Tech Stocks Underperform and Pharma Stocks Rise
The third major theme of the report predicts potential re-pricing of sectors and regions.
● In the risk scenario, pharmaceuticals may outperform the market, while tech stocks may underperform. At the same time, the dollar may weaken throughout 2026, and U.S. assets may continue to lag in dollar terms; the Eurozone and India may have upside potential.
● UBS's core view considers the pharmaceutical sector as a benchmark holding, but the risk scenario suggests that this sector will outperform the market. Pharmaceutical stocks are among the least leveraged defensive sectors and perform well when credit spreads widen, while current credit spreads are at historical lows.
Positive catalysts include: a significant strengthening of the dollar, accelerated wage growth in the U.S. benefiting defensive assets, and generative AI potentially accelerating new drug development by reducing costs and time and increasing success rates.
● In stark contrast is the risk associated with tech stocks. Although UBS's core view is that tech stocks will moderately outperform, the risk scenario indicates that this sector may lag. UBS warns that the rising ratio of capital expenditures to sales may ultimately harm profit margins. Semiconductor profit margins are at historical highs, and price-to-sales ratios are also nearing previous peaks.
The report specifically questions whether Nvidia's 53% net profit margin can be sustained permanently—only one large company in the UBS HOLT database has maintained such a high net profit margin for more than five years.
5. Global Asset Allocation Rebalancing
In addition to the three main themes mentioned above, the UBS report also presents several potential unexpected scenarios that could disrupt the market.
● The U.S. stock market may continue to underperform the global market. In dollar terms, U.S. stocks have experienced the largest drawdown relative to the global market in nearly 15 years. If global growth accelerates to over 3.5%, the U.S. typically underperforms due to its lowest operating leverage.
● The dollar may continue to weaken in 2026. UBS's forex team predicts that the euro will be at 1.22 against the dollar by the end of the first quarter, and then drop to 1.14 by year-end, but the global equity strategy team holds a bearish view on the dollar, believing there is a risk of continued weakening.
● Eurozone GDP growth may significantly exceed expectations. Composite PMIs indicate GDP growth of about 1.5%, while the savings rate is 3% higher than before the COVID-19 pandemic, which may lead to a decline.
● The Indian stock market may outperform the global market. India remains one of the most attractive structural growth stories globally, with nominal GDP growth more than double that of China; the manufacturing sector accounts for only half of China's GDP, and the urbanization rate is 30% lower.
● Copper mining stocks may underperform the market. The price-to-earnings ratio of copper mining stocks relative to the market is currently at extreme levels, with Southern Copper's P/E ratio exceeding twice the forecasted P/E ratio for 2029.
6. Differing Voices on Wall Street
In response to UBS's warnings, other Wall Street institutions hold differing views.
● Goldman Sachs' Wealth Management Investment Strategy Group recently released its 2026 outlook, stating that despite facing market turbulence, the U.S. remains firmly dominant. The institution believes that the U.S.'s unmatched economic, human capital, and financial market strength, combined with its system of checks and balances and exceptional resilience, supports its continued dominance.
● Regarding the issue of market bubbles, Goldman Sachs points out that the discussion becomes complicated due to the lack of a "bubble" definition applicable to all asset classes. A common working definition is a persistent deviation of asset prices from fundamentals. By this measure, Goldman Sachs does not believe the U.S. public equity market is in a bubble, as earnings remain the primary driver of returns.
● Goldman Sachs expects the U.S. economic growth rate to be 2.5% in 2026, above its trend growth estimate of 2.0%. In terms of monetary policy, it expects the Federal Reserve to cut rates by another 50 basis points this year.
● Institutions such as BlackRock, Bridgewater, and Pacific Investment Management Company are also focusing on inflation risks. These fund managers are adjusting their portfolios to address the inflationary risks that the market generally overlooks.
● The head of foreign exchange strategy for Standard Bank's G10 predicts that if the White House's calls for rate cuts are blocked, the U.S. 10-year Treasury yield may rise to 5%.
7. Investor Response Strategies
In response to the top ten unexpected scenarios outlined by UBS, different types of investors need to develop differentiated response strategies.
● For aggressive investors, tactical allocation can be utilized during the potential "melt-up" in early 2026, focusing on rotation opportunities in the software and semiconductor sectors. Close attention should be paid to whether U.S. Treasury yields approach 5% or whether the growth rate of capital expenditures in tech giants significantly exceeds revenue growth.
● Conservative investors can reduce their positions in U.S. stocks, especially avoiding highly leveraged companies that rely on low interest rates for survival. They can increase their allocation to global pharmaceutical sectors and non-U.S. equity assets, which have strong anti-fragility in the context of a weakening dollar and a restructuring of U.S. stocks.
● The core warning is: The biggest risk in 2026 is not an economic recession, but rather fiscal collapse behind the growth. Do not blindly believe that "economic growth = stock market rise." Operational advice also includes being cautious of dollar-denominated assets. If "dollar weakness" coincides with "rising interest rates," gold and physical assets will be the ultimate defensive positions.
The true value of the UBS report lies not in the accuracy of its predictions, but in providing investors with a multi-dimensional framework for examining risks—allowing for cognitive and positional space for surprises beyond consensus.
In the large conference room on Wall Street, UBS analysts marked every potential turning point on the S&P 500 index chart, with a dashed line representing "fair value at 8600 points" extending horizontally, and another curve indicating "sovereign debt crisis" rising vertically to the top of the chart.
While other investment banks are still discussing quarterly earnings, they have already turned their attention to the intersection of fiscal deficits and AI productivity, where the cracks in market consensus are quietly widening.
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