UBS Equities-European Equity Strategy _2026 Outlook - Europes next era_ ...-118811367

ab11 November 2025Global ResearchEuropean Equity Strategy2026 Outlook - Europe's next eraAfter three long years, we finally forecast a year of earnings growthAfter several years of valuation-led performance and consensus earnings disappointment, we, for the first time in three years, forecast a return to earnings growth in Europe in 2026. Consensus expectations point to earnings per share rising by 10–11%. This may prove a little too high but we think it's close to fair. We forecast 7% based on 3-4% sales growth with some margin expansion. Our target for the SXXP is 600 by year-end and 650 by the end of 2026. This reflects some further valuation expansion first, and then growth delivery through 2026.European renewal continues to drive the best investment opportunitiesThe most compelling opportunities are emerging from Europe’s renewal and structural investment. Renewables stand out, supported by over €2 trillion in grid and clean-power investment, while electrification benefits from regulatory tailwinds and sustained infrastructure spending. The banking sector is also well-positioned, with robust capital, accelerating loan growth, and attractive valuations. These themes are underpinned by fiscal expansion, policy support, and a shift towards domestic demand and investment.Top ideas include new 'international champions' and 'productivity leaders'
Our top trade ideas for 2026 include a focus on Europe’s new international champions. These 'GOTCHA' stocks (Global Opportunities for Thematic CHAmpions) are leveraging domestic policy tailwinds to achieve global growth.
We highlight productivity leaders that could further benefit from AI proliferation. Early adoption is driving some margin expansion and operational efficiency.
Key sectors at the centre of Europe's growth upswing include banks, utilities, and select industrials, all benefiting from positive earnings revisions, strong capital positions, and the structural shifts shaping Europe’s economic landscape.Europe doesn't beat the US, but it has better upside asymmetryOur base case does not forecast European equities to outperform the US, but the balance of risks has shifted positively. For the first time in three years, we see genuine upside asymmetry in Europe, driven by cheaper valuations, supportive policy, and the potential for outsized impact from renewed inflows. If catalysts such as stronger-than-expected earnings, successful policy implementation, or accelerated AI adoption materialise, Europe could deliver persistent positive surprises.Productivity is Europe's 'unlock'. AI proliferation may help.Some companies are already showing they can raise sales per employee and margins. In a series of reviews with analysts, we have also identified where artificial intelligence may support accelerated productivity gains. Early adopters are in sectors such as financials, industrials, and technology. Large, data-rich companies in service sectors are a focus for us in 2026. As AI becomes embedded i