HSBC Downgrades UK Equities to Neutral, Upgrades German Stocks to Overweight

HSBC has revised its strategic view on European equities for the second half of 2026, downgrading its rating for UK stocks to neutral from overweight. The bank simultaneously upgraded German equities to overweight from neutral, reflecting a divergence in the economic and earnings outlooks for the continent's largest markets.

UK and France Ratings Cut

According to a note from the bank, the downgrade of UK equities stems from a higher bar for corporate earnings to beat expectations, given the market's significant exposure to the energy and materials sectors. This change comes even as HSBC acknowledges that UK growth expectations have been revised higher and policy uncertainty has recently eased.

French equities were also downgraded to neutral from overweight. HSBC pointed to softening domestic activity, sharply weaker earnings estimate momentum, and persistent political and fiscal uncertainty as reasons for a more balanced risk/reward profile.

Germany Upgraded on Recovery Potential

In contrast, HSBC lifted its rating on German equities to overweight, citing several potential catalysts. The bank sees an opportunity for a business climate recovery from currently depressed levels, improving relative earnings-per-share (EPS) momentum, and the initial impact of fiscal stimulus.

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The note also highlighted that German market valuations have eased and that mixed positioning among global investors leaves room for increased exposure. HSBC noted that the German market has significantly underperformed the broader FTSE Europe index over the past year.

European and Sector Outlook

Despite the country-level adjustments, HSBC reiterated its year-end 2026 forecast for the Stoxx 600 index at 670, a target it has maintained since January. The bank noted that bottom-up earnings expectations have been resilient, with the second quarter anticipated to be the strongest in three years.

HSBC outlined its preferred sector positioning:

• Overweight Banks: Supported by a "higher-for-longer" interest rate environment and improving lending growth, with a preference for Italian and Spanish lenders over UK and French banks.
• Overweight Industrials: Driven by a multi-year capital expenditure cycle in infrastructure, defense, and fiscal expansion.
• Overweight Utilities: Benefiting from structural investment in electrification and data-center demand.
• Underweight Consumer Discretionary: Citing the auto sector's particular exposure to intensifying competition from Chinese manufacturers.