Traders may rotate into Bitcoin if UBS’ bearish US stocks view comes true

Key takeaways:

• Analysts downgraded US stocks due to high valuations, a weak dollar and policy risks despite AI-driven earnings growth.

• Limited S&P 500 upside may shift capital toward Bitcoin, especially if major sovereign funds announce BTC reserves.

Bitcoin (BTC) price plunged below $65,500 on Friday, effectively erasing gains established on Wednesday. This correction closely tracked intraday S&P 500 movements after wholesale inflation data in the US triggered increased risk aversion. A report from investment bank UBS downgrading US stocks to neutral likely accelerated the surge in demand for the safety of fixed-income assets.

Investors fear that a potential doomsday scenario for the US equities market could drive Bitcoin to new yearly lows. While increased spending on artificial intelligence infrastructure remains a primary concern for some, Bitcoin’s long-term trajectory is unlikely to remain dependent on the technology sector.

Bitcoins Institutional Bitcoin adoption could improve market sentiment

According to the UBS global equity strategy team, valuations within the US equity market are no longer attractive compared to other global regions. Analysts cited mounting risks from a weakening dollar and US policy turbulence, which are creating asymmetric structural downside risks. Furthermore, corporate buybacks appear to be losing their effectiveness in sustaining price levels.

The relevance of the $70 trillion US market capitalization should not be overstated, even as it disturbs price trends on supposedly uncorrelated assets like Bitcoin. Still, the UBS report is far from a doomsday prediction, especially considering their year-end S&P 500 target remains at 7,500.

Part of the recent decline to $65,500 is explained by Friday’s US Producer Price Index jumping 0.5% in January from the previous month. When inflation metrics surprise to the upside, traders often become less certain regarding interest rate cuts from the US Federal Reserve. A restrictive monetary policy negatively impacts the economy as credit remains expensive and companies have fewer incentives to expand production.

The US Treasury yield serves as a proxy for investor risk assessment. During periods of uncertainty, traders seek shelter in government bonds, regardless of current inflationary trends. The unusual decline in the US 10-year Treasury yield to 3.97% from 4.21% just three weeks prior signals a shift toward risk-averse sentiment. This is particularly notable as the S&P 500 exhibited signs of weakness despite positive surprises in corporate earnings.

The UBS global equity strategy report says US stocks are trading 35% above global peers, versus an average premium of 4% since 2010. Analysts mentioned volatility added by US policy proposals to cap credit card interest rates, implement additional import tariffs and place potential limits on private equity investment in housing. However, the bank expects AI adoption in the US to help sustain earnings growth across key industries, according to CNBC.

If the S&P 500 upside proves limited, Bitcoin could benefit from eventual capital rotation as gold, the absolute leader store of value, has already soared to a $36.5 trillion market capitalization. To put things in perspective, the 10 largest tech companies have a combined market capitalization of $24.2 trillion. Even if Bitcoin price rallies by 52% to $100,000, its market capitalization would be $2 trillion. Thus, unless fixed income or real estate markets benefit from the potential capital rotation, Bitcoin remains a valid candidate.

Related: Spot Bitcoin ETFs take in $1B in three days as investors buy the dip

Sentiment toward Bitcoin could shift favorably as soon as new major companies or sovereign funds announce strategic BTC reserves, even if formed through exchange-traded fund (ETF) exposure. There is no way to predict when those events could happen, but history has proven how trader risk perception can shift favorably when a company such as Tesla (TSLA) announced a relevant Bitcoin position. But until then, the odds of an onchain decoupling from the US stock market remain low.