UBS Holds Neutral Stance on UK Equities Despite Strong Earnings Outlook

Analysts at UBS are holding a "neutral" rating on UK equities, indicating that while the domestic market backdrop is supportive, better investment opportunities exist in regions with greater exposure to cyclical or structural growth trends.

Strong Earnings and Valuation Picture

UBS has significantly upgraded its earnings growth forecast for UK equities this year to 11%, a substantial increase from its initial 5% projection at the start of 2026. According to the bank, this revision is largely driven by a recent surge in oil prices. The positive momentum is expected to continue, with earnings growth forecast at around 10% for 2027 as an improving economy is anticipated to offset a rollover in oil prices.

From a valuation perspective, the market appears reasonable. UK equities are trading at 12.3 times forward price-to-earnings, which is slightly below the median of 12.8 times recorded since 1990, UBS noted. The bank has set a FTSE 100 target of 11,000 for December 2026 and 11,300 for June 2027.

Preference for Global Growth Exposure

Despite the positive domestic picture, UBS stated its preference for other regions that are more geared toward a global manufacturing recovery or have higher exposure to secular growth themes like artificial intelligence and electrification. The analysts noted that such opportunities within the UK are better accessed through single-stock selection, a factor they believe explains the narrow market leadership observed over the past year.

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The bank also outlined potential risks and opportunities. A downside scenario could see the FTSE 100 fall to 7,700 due to factors like energy disruptions or renewed trade wars. Conversely, an upside target of 12,300 by June 2027 is possible if global growth accelerates and sterling weakens.

Sector Views and Macro Factors

UBS upgraded its view on UK banks to "Attractive," citing solid loan demand, elevated capital markets activity, and a supportive interest rate environment. The bank highlighted that return on equity has recovered to pre-2008 financial crisis levels and that strong capital positions support a prospective dividend yield of 4.3%. Preferences were also maintained for the industrials, consumer discretionary, and health care sectors.

On the macroeconomic front, UBS sees limited near-term impact from domestic politics, as UK-listed companies generate approximately 75-80% of their earnings overseas. Consequently, the bank stated that currency fluctuations have a more significant impact on FTSE 100 returns than shifts in the UK's domestic growth outlook.