Analysts at UBS argue there is scope for "modest further upside" in Eurozone equities, citing a combination of improved cyclical momentum, a structural backdrop that favors certain sectors, and valuations they consider reasonable.
In a client note, strategists including Matthew Gilman and Rolf Ganter highlighted the ongoing fourth-quarter earnings season as a "critical signpost" for their constructive stance on European corporate earnings. With more than half of companies having reported, UBS notes that 54% of Eurozone firms have beaten consensus forecasts for earnings per share while 35 have been below, which the team characterizes as "a slightly above average results season so far." The strategists emphasize that, although revenues have been "weak," firms are topping estimates largely due to "strong cost controls."
According to the note, these cost efficiencies create the conditions for "material operating leverage when volumes do eventually pick up." That anticipated operating leverage is central to UBS's earnings thesis and is described as the key driver of their positive outlook for corporate profits.
UBS's strategists expect revenues to start rising gradually from the second quarter of 2026, pointing to what they describe as "encouraging green shoots" in global business activity, U.S. employment, and German industrial orders. Based on this outlook, they project Eurozone earnings growth of around 7% in 2026 and about 18% in 2027, following three years without income expansion.
Positioning preferences in UBS's regional view favor "beneficiaries of the cyclical upswing," notably banks and industrial companies, along with areas exposed to longer-term structural trends such as IT services. In contrast, the firm has trimmed its view on the European utilities sector. While UBS acknowledges potential tailwinds for utilities from an artificial intelligence-driven increase in power demand and broader electrification, it argues valuations in the sector are "less attractive" and that utilities stand to gain less from a cyclical recovery compared with more economically sensitive sectors.
Market context cited by the strategists includes a year-to-date gain of more than 5% for the pan-European Stoxx 50, while the U.S. benchmark S&P 500 has risen by approximately 0.7% so far this year.
Summary
- UBS sees modest additional upside for Eurozone equities based on recent earnings momentum and an improving macro picture.
- Majority of reported firms have beaten EPS forecasts so far, with revenue weakness offset by strong cost controls.
- Analysts expect revenues to begin recovering from Q2 2026, supporting earnings growth in 2026 and 2027.
Key points
- Results season: 54% of reported Eurozone companies have beaten EPS consensus while 35 have been below, described as slightly above average results so far - this supports UBS's positive earnings view.
- Sectors favored: cyclical beneficiaries such as banks and industrials, plus IT services, are preferred; utilities' view has been reduced due to less attractive valuations and smaller cyclical upside.
- Timing and growth: revenues are expected to pick up from Q2 2026, with UBS forecasting roughly 7% earnings growth in 2026 and 18% in 2027.
Risks and uncertainties
- Revenue weakness persists: current revenue trends remain soft, and the recovery UBS expects beginning in Q2 2026 may not materialize as projected.
- Reliance on cost controls: elevated earnings relative to revenue imply dependence on cost management; if margins erode or costs rise, the anticipated operating leverage could be smaller.
- Valuation and sector sensitivity: utilities have reduced appeal according to UBS because valuations are "less attractive" and they are expected to benefit less from cyclical improvement compared with more economically sensitive sectors.