U.S. stocks: "Skyrocket first, crash later"? U.S. bonds break 5%, tech loses to pharma... These "ten surprises" in 2026 could upend the market

U.S. stocks: "Skyrocket first, crash later"? U.S. bonds break 5%, tech loses to pharma... These "ten surprises" in 2026 could upend the market

U.S. stocks may surge more than 20% first, followed by a bubble burst and steep decline; the U.S. 10-year Treasury yield may break through its previous high of 5%; tech stocks may significantly underperform, while pharmaceutical stocks may rise conspicuously.

According to WindChaser Trading Desk, UBS Global Equity Strategy released a report on February 2, 2026, proposing “Ten Major Surprises.” These are not their base predictions but reminders that market consensus may be underestimating tail risks and the speed of style shifts. For investors, the key impacts are concentrated on three main tracks:

1) The stock market may "rise first then crash": The team notes the market is only pricing around a 20% probability of a bubble, but the actual probability may be over 80%. This means the market could still rise 20% before the bubble bursts, leading to a “real bear market.”

2) Interest rate tail risks rising: If the U.S. 10-year Treasury yield climbs above 5% (the previous recent high was 5.04%), traditional asset allocation’s “bond hedge” may be further weakened;

3) Sector and regional valuations may be rewritten: In risk scenarios, pharma may outperform, tech may underperform; at the same time, the USD may weaken throughout 2026, and U.S. assets may continue lagging in USD terms; Eurozone, India, etc. have potential for upside surprise; while copper stocks with “bullish consensus” may actually underperform.

Surprise #1: U.S. Stocks “Party→Crash” Cycle

UBS main view: MSCI Global Index year-end target 1130, about 8% upside potential

Risk scenario: First a bubble surge, then a collapse

UBS points out that the market currently assigns only about a 20% probability to a bubble, but this may rise above 80% (which means stocks still have about 20% upside). Since last December, all seven preconditions for bubble formation have appeared: stocks have outperformed bonds for the long term; “this time is different” narratives; last bubble was 25 years ago; margin pressures; high concentration; retail buying; easy monetary conditions.

More critically, this bubble is better justified than any prior ones. First, generative AI may break “Amara’s Law”—we tend to overestimate tech’s short-term impact and underestimate the long-term, but this time both might be underestimated. U.S. quarterly productivity growth has surged to 4.9%. If productivity rises by 2% annually from 2028, fair value for the S&P 500 would reach 8600.

Second, government debt monetization risk. U.S. federal deficit is 4.2% of GDP, and government debt is 125.1% of GDP—far higher than during the TMT bubble. UBS sees three choices for governments: default (very unlikely), forced fiscal tightening (50% probability), or central banks print money to buy debt (at least 30% probability).

But UBS emphasizes that the bubble peak is not here yet. None of the seven warning signals for a peak are present: Mag 6’s P/E is only 33× (bubble peaks are usually 45–72×); equity risk premium still at 2.6% (versus 1% at peaks); credit spreads near historic lows, not rising; volatility is subdued (S&P 500’s max drawdown since 4/8 is only 5%); the Fed is lowering rates, not hiking them dramatically; ISM new orders have not plunged; no extreme M&A activity.

Once the bubble finally bursts, possible triggers include: excess investment in tech cutting margins, surging bond yields amid fiscal discipline worries, immigration falling and strong growth driving wages higher, AI causing more sector devaluation than repricing, lagged impacts of higher rates and corporate tax.

Surprise #2: Sovereign Debt Crisis Pushes U.S. Treasury Yield Above 5%

UBS main view: U.S. 10-year Treasury yield falls to 4% by year-end

Risk scenario: U.S. Treasury yields break previous high of 5.04%

UBS warns governments may “spend until collapse.” The vast majority of developed country elections over the past two years saw incumbents lose majority or office. Many believe this is due to stagnant per-capita GDP since 2018. The short-term solution may be huge government spending.

In the U.S., President Trump polling at 38%, ahead of the midterm elections, has proposed a raft of spending: by FY2027, defense spending up 50% (1.2% of GDP), $2,000 tax cuts per capita (2% of GDP).

Even more worrying is that this is happening as fiscal conditions are already stretched. The U.S. needs a 1.52% primary budget surplus to stabilize debt, but is running a -4.2% deficit, a gap of 3.4%. If all debt were financed long-term and the central bank did not intervene, it would be much worse.

Other factors pushing yields up: implied 5y/5y inflation expectations at core PCE 2%, but the Fed has missed the inflation target for nearly five years; U.S. curve is only neutral; upward pressure from Japanese and German yields; global and U.S. growth keeps getting revised up; foreign holdings of U.S. Treasuries at risk from geopolitical tensions; pensions shifting from DB to DC leading to bond selling.

Investment advice: avoid high leverage and low free-cash-flow stocks; consider domestic equities in fiscally sound regions (Switzerland, Taiwan); financials and firms with unhedged pension deficits may benefit; maintain gold overweight to hedge debt monetization risk.

Surprise #3: U.S. GDP Growth Exceeds 3%, Fed Forced to Reverse Policy

UBS main view: U.S. GDP grows 2.6% in 2026, Fed to cut rates twice

Risk scenario: GDP grows over 3%, Fed forced to hike

Upside surprises: Every 10% increase in stocks adds $6 trillion to household wealth; if 3–5% is spent, it adds 0.7–1% to GDP; tech investment added 85bps to GDP growth over past four quarters, hyperscalers’ 2026 capex expected up 30%, Oracle just hiked its 2026 capex plan 42% to $50B; policy uncertainty declining; non-AI capex rebounding; global monetary stimulus; Japan may ease by 0.8% of GDP, China may exceed 1–1.5% forecasts.

The real risk: unexpectedly strong economy could trigger wage acceleration, especially with zero labor force growth. If wages rise and inflation returns (UBS sees core PCE at 3.1%), the Fed may have to abruptly reverse course. Then, by end-2026 rates may be 4% instead of market expectation of 3.15%.

Investment impact: financials may outperform, dollar strengthens, shift to defensive sectors overall.

Surprise #4: Pharmaceutical Stocks Unexpectedly Outperform

UBS main view: Pharma stocks neutral baseline allocation

Risk scenario: Pharma stocks outperform the market

UBS lists reasons for pharma outperformance: sector currently implies Eurozone PMI new orders at 55 (equivalent to 2.5% GDP growth), which is unlikely to materialize.

Pharma is one of the lowest-leverage defensive sectors, performs well when credit spreads widen (currently near lows); earnings revisions in line with market, relative CPI pricing at median; valuations are cheap.

Positive catalysts: strong USD (pharma is Europe’s biggest USD earning sector); if U.S. wage growth speeds up, market may rotate to defensives; drug pricing pressures to ease after November; AI in drug discovery—generative AI could cut pre-clinical testing time from 5 years to 2, halve drug development cost (normally $2.9B).

Surprise #5: Tech Stocks Significantly Underperform

UBS main view: Tech stocks moderately outperform, but highly selective (focus on TSMC, ASML, Microsoft, China platform companies, Amazon, Samsung; cautious on Apple, Tesla)

Risk scenario: Tech underperforms the market

UBS warns, rising capex-to-sales ratios may eventually hurt margins. Hyperscalers’ capex-to-sales just surpassed telco peak at 26% in 2000. Oracle’s stock dropped after announcing capex up 42%, with 2026 free cash flow yield at -5.2%, net debt/EBITDA at 3×—very unusual for a software firm.

Semiconductor margins are at historic highs, which is why their price-to-sales is near peak. UBS doubts Nvidia can maintain a 53% net margin—UBS HOLT database shows only one major firm ever kept such a margin over five years. Google’s TPU, Amazon’s Trainium 3, are creating more competition.

Online advertising faces threat: 73% of ads are now online, a mature sector; if OpenAI pivots to ads, competition heats up; web founder Tim Berners-Lee warns, when LLMs read content instead of humans, ad business models collapse; social media usage fell 7% last year.

Software could be disrupted: "From ‘software eats the world’ to ‘AI eats software.’" Generative AI means fewer white-collar jobs, so lower subscriptions and licensing for software firms; Klarna is ditching Salesforce and Workday; Coke made ads with OpenAI for a tiny fraction of traditional costs.

The upside surprise could be software outperforming semis from here: software extremely oversold; earnings revisions better than performance, the most extreme gap across sectors; least liked by sell side relative to normal; already sharply devalued.

Surprise #6–10: Other Key Risks

Surprise #6: U.S. market continues underperforming. In USD terms, U.S. stocks have seen the biggest relative drawdown versus global markets in nearly 15 years. If global growth accelerates above 3.5%, U.S. typically lags due to least operating leverage. USD weakens; buyback yield no longer stands out (now level with global markets); ex-tech, U.S. sector P/E still high; if tech underperforms, U.S. underperforms 80% of the time.

Surprise #7: USD keeps weakening all year. UBS FX sees EUR/USD at 1.22 in Q1, but fading to 1.14 by end-2027. Risk is USD stays weak: net external debt is 80% of GDP, USD still overvalued, over-held (57% of global FX reserves, just 16% of global trade), USD bull and bear cycles last 9.5–10 years, Fed credibility eroding, USD no longer diversifies risk, Trump has repeatedly said he doesn’t want a strong dollar.

Surprise #8: Eurozone GDP growth beats expectations by a large margin. Composite PMI aligns with 1.5% GDP growth; savings rate still 3% above pre-pandemic, excess savings equal to 10% of GDP; energy and food prices dropping (UBS sees natgas -25%); possible Ukraine ceasefire could add 0.3% to Europe’s GDP in 12–18 months; impact of fiscal easing may exceed forecasts.

Surprise #9: India market outperforms. India has seen its biggest relative drawdown vs EM since 2009. Pros: one of the best structural growth stories, nominal GDP growth 8.7% (twice China’s); market P/E back to long-term average; re-coupling to PMI; if oil drops 10%, GDP gets 40bps boost; RBI could be even more dovish than expected; Rupee looks cheap; possible tariff reversal.

Surprise #10: Copper miners underperform. Copper miner relative P/E at extreme: Southern Copper’s expected 2029 P/E is 36.4×, Antofagasta 23.4×; copper/aluminum price ratio at a level where 20% substitution possible; copper miners just tracking copper price, market assumes price gains are permanent, no demand destruction or recession; China must shift from investment-led to consumption-led, yet 58% of copper demand is from China, 70% tied to investment; copper miners extremely overbought.

Investor Takeaways

The UBS “Ten Major Surprises” framework reminds investors: market consensus is not set in stone, and 2026 may bring wild volatility. For investors seeking steady returns, the key is to be prepared for these “tail risks” on top of core allocations: moderate gold allocation to hedge debt monetization risk, pay attention to defensive sectors like pharma, be alert for corrections in overvalued tech stocks, be increasingly selective within tech. History shows, when all the preconditions for bubbles are present, it’s a moment of both opportunity and risk—markets could still rally 20%, or eventually plunge 80%. Investors must stay highly vigilant and ready to shift their strategies any time.

 

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The above wonderful content is from WindChaser Trading Desk.

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