UBS Upgrades European Earnings Forecast, Identifies Four Key Investment Themes

UBS strategists have upgraded their 2026 earnings growth forecast for European equities to 15%, declaring that the region's earnings cycle is turning after three years of stagnation. The bank pointed to a broadening recovery driven by improving demand, not just cost-cutting, as a sign of a more durable upswing.

A Broadening Recovery

According to a note led by strategist Dean Turner, the recovery is expanding beyond a narrow group of structural leaders, pointing to "the early stages of a more durable earnings upcycle." This optimism is supported by an improving global manufacturing backdrop, with global manufacturing PMI new orders returning to expansion territory after a prolonged period of contraction.

Recent data underscores this trend. In the second quarter, profit growth for European companies (excluding the energy sector) accelerated to 11% year-over-year, its fastest pace since 2022. Revenues for the same group rose 8% year-over-year, also the strongest growth rate since 2022, according to the bank's analysis.

Four Key Opportunities

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In light of the turning cycle, UBS outlined four investment opportunities for investors navigating the European market:

• Capital Spending Enablers: This includes European industrial and IT companies with high exposure to AI infrastructure, electrification, and automation. UBS noted that about 55% of the MSCI Europe IT sector by market cap consists of businesses supplying semiconductor equipment, power systems, and data-center components.
• European Banks: The sector is well-positioned to benefit from rising loan demand and capital markets activity. The note highlights that the average Eurozone loan-to-deposit ratio declined to 93% in the first quarter of 2026, leaving banks with a significant surplus of customer deposits.
• "European Leaders": This theme focuses on best-in-class companies exposed to long-term structural trends, including Industry 4.0, decarbonization, shifting consumer trends, and increased infrastructure and defense investment.
• Swiss Mid-Caps: UBS identified Swiss mid-cap stocks as its preferred way to access the recovery in Switzerland. Strategists see a "compelling combination of structural growth, cyclical upside and reasonable valuations" in the segment, adding that an upcoming index rebalancing should make it more cyclically oriented.

Structural Demand Drivers

As a structural source of demand, UBS also pointed to rising European defense spending. Spending by European NATO members and Canada increased by 19% in 2025 and is expected to grow by another 11% in 2026, reaching $634 billion. This trend is expected to provide a long-term tailwind for relevant industrial and technology companies.