US stocks might first surge over 20%, then crash as the bubble bursts; the US 10-year Treasury yield could break above the previous high of 5%; technology stocks might significantly underperform, while pharmaceutical stocks could emerge as a surprise winner.
According to the report, UBS's global equity strategy team released a report on February 2, 2026, proposing "Ten Surprises." These are not their baseline forecast but serve as a reminder: market consensus may be underestimating tail risks and the speed of style rotation. For investors, the most critical potential shocks are concentrated along three main themes: 1) The stock market might first "rally" then "crash": The team believes the market is currently pricing in only about a 20% probability of a bubble, but the probability we are in a bubble may exceed 80%, implying stocks could still rise another 20% before the bubble bursts, leading to a "real bear market"; 2) Upside tail risks for interest rates: If the US 10-year Treasury yield rises above 5% (the recent peak was 5.04%), the traditional "bond hedge" in asset allocation could continue to be weakened; 3) Sector and regional pricing could be rewritten: In a risk scenario, Pharmaceuticals might outperform, while Technology stocks might underperform; simultaneously, the US dollar could weaken throughout 2026, potentially causing US assets to continue lagging on a USD-denominated basis; the Eurozone and India, among others, have room for upside surprises; conversely, copper mining stocks, which "consensus is bullish on," might instead underperform.
Surprise One: The US Stock "Rally-Crash" Cycle
UBS Core View: MSCI World Index year-end target of 1130 points, implying roughly 8% upside. Risk Scenario: A sharp rally forming a bubble, followed by a crash. UBS points out that the market is currently pricing only about a 20% probability of a bubble, but this probability could rise above 80% (which would imply stocks have about 20% more upside). Since last December, all seven prerequisites for bubble formation have been met: stocks significantly outperforming bonds over the long term, a "this time is different" narrative, 25 years since the last bubble, overall margin pressure, high concentration, retail buying, and loose monetary conditions.
More crucially, the rationale for this bubble is stronger than ever. First, generative AI might break "Amara's Law" – we tend to overestimate a technology's short-term impact and underestimate its long-term impact, but this time we might be underestimating both. US quarterly productivity growth has surged to 4.9%. If productivity increases by 2% starting from 2028, the fair value of the S&P 500 would reach 8600 points.
Second, the risk of government debt monetization. The US federal deficit as a percentage of GDP is 4.2%, and government debt to GDP is 125.1%, far exceeding levels during the TMT bubble. UBS believes governments face three choices: default (very low probability), forced fiscal austerity (50% probability), or central banks printing money to buy bonds (at least 30% probability).
However, UBS emphasizes that we are far from the bubble peak. None of the seven warning signs of a bubble peak have appeared: The Mag 6 P/E is only 33x (typically reaches 45-72x at a peak), the equity risk premium is still 2.6% (falls to 1% at a peak), credit spreads are near historic lows rather than rising, volatility hasn't increased (the S&P 500's maximum drawdown since April 8 is only 5%), the Fed is cutting rates rather than hiking aggressively, ISM New Orders haven't collapsed, and there are no extreme M&A deals.
Once the bubble ultimately bursts, potential triggers could include: over-investment in tech leading to a sharp drop in margins, bond yields spiking due to fiscal discipline concerns, accelerated wage growth driven by reduced immigration and strong growth, industry devaluation from AI outweighing revaluation, and the lagged effects of higher interest rates and higher corporate tax rates.
Surprise Two: Sovereign Debt Crisis Pushes US Treasury Yields Above 5%
UBS Core View: US 10-year Treasury yield falls to 4% by year-end. Risk Scenario: US Treasury yield breaks above the previous high of 5.04%. UBS warns that governments might "spend until they break." In the vast majority of developed market elections over the past two years, incumbent governments have lost the election or their majority. Many commentators attribute this to stagnant per capita GDP growth since 2018. A short-term expedient might be for governments to spend heavily. In the US, President Trump's approval rating is 38%, and as midterm elections approach, he has proposed a series of spending plans: a 50% increase in defense spending by FY2027 (costing ~1.2% of GDP), and implementing a $2,000 per person tax cut (costing ~2% of GDP). More worryingly, this comes at a time when fiscal conditions are already very tight. The US needs a primary budget surplus of 1.52% to stabilize debt, but the actual figure is a -4.2% deficit, a gap of 3.4%. The situation would be even more severe if all debt were financed long-term without central bank support.
Other factors pushing yields higher include: 5-year, 5-year forward inflation expectations implying core PCE of 2%, but the Fed has exceeded its inflation target for nearly 5 consecutive years; the US yield curve is only at a neutral level; upward pressure on Japanese and German yields; ongoing upward revisions to global and US growth; foreign holdings of US Treasuries potentially at risk due to geopolitical deterioration; and bond selling due to pension shifts from Defined Benefit (DB) to Defined Contribution (DC) plans.
Investment Implication: Avoid stocks with high leverage and low free cash flow; focus on domestic stocks in regions with excellent fiscal conditions like Switzerland and Taiwan; financial stocks and companies with unhedged pension deficits might benefit; remain overweight gold to hedge debt monetization risk.
Surprise Three: US GDP Growth Exceeds 3%, Forcing Fed Policy Reversal
UBS Core View: 2026 US GDP growth of 2.6%, Fed cuts rates twice more. Risk Scenario: GDP growth exceeds 3%, forcing the Fed to hike rates. Upside risks include: A 10% rise in stocks adds nearly $6 trillion to household wealth; if 3-5% of that is consumed, it could contribute 0.7-1% to GDP; tech investment contributed 85 basis points to GDP growth over the past four quarters, with hyperscale cloud companies' 2026 capex expected to grow 30%; Oracle just raised its 2026 capex budget by 42% from $35B to $50B; declining policy uncertainty; non-AI capex recovery; global monetary stimulus; Japan could ease by an additional 0.8% of GDP, China could exceed the expected 1-1.5%. The real risk is: unexpectedly strong economic growth could accelerate wage growth, especially with labor force growth currently at zero. If wage growth rises and inflation picks up (UBS forecasts core PCE rising to 3.1%), the Fed might be forced to pivot quickly. In this scenario, markets could see rates at 4% by end-2026, versus consensus expectations of 3.15%. Investment Impact: Financial stocks could outperform; the US dollar could strengthen; a potential general rotation into defensive sectors.
Surprise Four: Pharmaceuticals Unexpectedly Outperform
UBS Core View: Benchmark allocation to Pharmaceuticals. Risk Scenario: Pharmaceuticals outperform the market. UBS lists reasons Pharmaceuticals could outperform: The sector currently implies Eurozone PMI New Orders of 55 (equivalent to 2.5% GDP growth), which is unlikely to be achieved.
Pharmaceuticals is one of the least leveraged defensive sectors, performing well when credit spreads widen, which is currently at historic lows; earnings revisions are in line with the market, and relative CPI pricing is at a medium level; valuations are cheap.
Positive catalysts include: significant US dollar strength (Pharma is Europe's largest US dollar revenue sector); if US wage growth accelerates, markets could rotate defensively; drug pricing pressures continue to ease post-November; AI application in drug discovery – generative AI could shorten preclinical trial times from 5 years to 2 years, halving drug launch costs (typically $2.9B).
Surprise Five: Technology Significantly Underperforms
UBS Core View: Technology moderately outperforms, but is highly selective (favouring TSMC, ASML, Microsoft, Chinese platform companies, Amazon, and Samsung Electronics, but cautious on Apple and Tesla). Risk Scenario: Technology underperforms the market. UBS warns that rising capital expenditure as a percentage of sales could ultimately hurt margins. Hyperscale cloud companies' capex-to-sales ratio has surpassed the 26% peak reached by telecom companies in 2000. Oracle's stock reacted negatively after announcing a 42% capex increase; its 2026 free cash flow yield is -5.2%, with net debt/EBITDA at 3x – highly unusual for a software company.
Semiconductor margins are at historic highs, which is why semiconductor price-to-sales ratios are also near previous peaks. UBS questions whether Nvidia's 53% net profit margin can be sustained permanently – in the UBS HOLT database, only one large company has maintained such a high net margin for more than 5 years. Google's TPU chips and Amazon's Trainium 3 chips are creating more competition.
Online advertising faces threats: 73% of ads are already online, making it a mature industry; competition will intensify if OpenAI focuses on ads; internet inventor Tim Berners-Lee warned that ad-based business models collapse when LLMs read content and humans don't; social media usage time fell 7% last year. Software could be disrupted: "From 'software eating the world' to 'AI eating software'." Generative AI means fewer white-collar jobs, thus fewer subscriptions and licenses for software companies; Klarna mentioned it will no longer use Salesforce and Workday; Coca-Cola recently used OpenAI to create ads at a fraction of the traditional cost. The surprise might be that software starts outperforming semiconductors from here: Software is exceptionally oversold; earnings revisions are better than performance, the most extreme gap of any sector; it's one of the least liked sectors by sell-side relative to norm; it has already de-rated significantly.
Surprises Six to Ten: Other Key Risks
Surprise Six: US Market Continues Underperformance. In USD terms, US stocks have experienced their largest relative drawdown against global markets in nearly 15 years. If global growth accelerates above 3.5%, the US typically underperforms as it has the lowest operational leverage. A weaker USD, buyback yield no longer standout (has fallen to parity with global markets), sector-adjusted P/E excluding Tech remains elevated, and if Tech underperforms, the US underperforms 80% of the time.
Surprise Seven: USD Weakens Persistently Throughout the Year. UBS FX team forecasts EUR/USD at 1.22 in Q1, but falling back to 1.14 by end-2027. The risk is persistent USD weakness due to: net external debt still ~80% of GDP, the USD remains overvalued, excessive USD holdings (57% of global reserves but only 16% of global trade), USD bull and bear markets typically last 9.5-10 years, erosion of Fed credibility, the USD no longer diversifying risk, and President Trump repeatedly stating he does not want a strong dollar.
Surprise Eight: Eurozone GDP Growth Significantly Stronger Than Expected. Composite PMI is consistent with ~1.5% GDP growth; the savings rate is still 3% higher than pre-pandemic, with excess savings stock at 10% of GDP; falling energy and food prices (UBS forecasts a 25% drop in gas prices); a potential Ukraine ceasefire, which UBS analysts estimate could add 0.3% to European GDP growth within 12-18 months; the impact of fiscal easing could be greater than expected.
Surprise Nine: Indian Market Outperforms. India has experienced its largest relative drawdown against Emerging Markets since 2009. Supporting factors include: one of the best structural growth stories, with 8.7% nominal GDP growth still double that of China; P/E relative to global equities is back to historical average; Indian performance re-coupling with PMI; a 10% drop in oil prices could contribute 40 bps to GDP growth; the Reserve Bank of India could be more dovish than expected; the Rupee looks cheap; potential for tariff reversals.
Surprise Ten: Copper Mining Stocks Underperform. Copper miners' P/E relative to the market has reached extreme levels, with Southern Copper's 2029 expected P/E at 36.4x and Antofagasta's at 23.4x; the copper-to-aluminum price ratio is at a level where 20% substitution can occur; copper miners are merely tracking the copper price, implying the market assumes price increases are permanent without demand destruction or recession; China must shift from investment-led to consumption-led growth, with 58% of copper demand from China and 70% related to investment; copper miners are extremely overbought.
Implications for Investors
UBS's "Ten Surprises" framework reminds investors that market consensus is not set in stone, and 2026 could see sharp volatility. For investors seeking stable returns, the key is to prepare for these "tail risks" on top of core allocations: moderately allocate to gold to hedge debt monetization risk, focus on defensive sectors like Pharmaceuticals, be wary of correction risks in high-valuation Tech stocks, and be more selective within the Tech sector. Historical experience shows that when all the prerequisites for a market bubble are in place, it is often a moment of both opportunity and risk – stocks could rise another 20%, or ultimately crash 80%. This demands that investors remain highly vigilant and ready to adjust strategies at any time.
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