UBS strategists say Europe has entered the early stages of an earnings recovery after roughly three years of stagnation, with rising demand and a firmer global manufacturing environment supporting the case for further gains in regional equities.
Led by Dean Turner, the UBS strategy team reported that the earnings improvement is widening beyond a small group of structural outperformers and is increasingly being underpinned by higher end-market demand rather than cost reductions alone. "In our view, this points to the early stages of a more durable earnings upcycle," they wrote.
Reflecting that view, UBS raised its forecast for European earnings growth in 2026 to 15% and said it still expects robust growth in 2027. The strategists pointed to recent improvements in global manufacturing activity as an important backdrop: new orders in global manufacturing PMIs have moved back into expansion territory after spending much of the previous three years in contraction.
UBS highlighted specific results from the second quarter that it says support the recovery thesis. Profit growth excluding energy accelerated to 11% year-over-year in Q2, the fastest pace since 2022, while revenues excluding energy rose 8% year-over-year over the same period, also the strongest growth rate since 2022.
From these trends, the bank distilled four distinct investment opportunities in European markets.
- Enablers of capital spending - This group includes European industrials and information technology companies with significant exposure to AI infrastructure, electrification and automation. UBS notes that roughly 55% of the MSCI Europe IT sector by market capitalization is composed of businesses supplying semiconductor equipment, power systems, cooling and data-center-related components, positioning them as suppliers to the capex cycle.
- European banks - UBS says banks stand to gain from rising loan demand and stronger capital markets activity. The strategists point out that Eurozone corporate loan growth accelerated to 4.4% year-over-year in July 2026, and that the average Eurozone loan-to-deposit ratio has fallen to 93% in the first quarter of 2026 from above 140% around the global financial crisis, leaving banks with a notable surplus of customer deposits relative to loans.
- European leaders - UBS highlights best-in-class companies across the region that are exposed to structural trends such as industry 4.0 and automation, defense and infrastructure spending, decarbonization, and shifting demographics and consumer patterns. These firms are presented as core beneficiaries of both structural change and cyclical improvement.
- Swiss mid-caps - UBS prefers Swiss mid-cap stocks as the primary way to access Switzerland’s recovery. The strategists say Swiss mid-caps offer "the more compelling combination of structural growth, cyclical upside and reasonable valuations." They also note that an upcoming rebalancing of the mid-cap SMIM index on September 18 should tilt that index toward more cyclical names, while the large-cap SMI index will become relatively more defensive.
Beyond these sector- and market-level ideas, UBS flagged rising European defense spending as a structural source of demand. The bank referenced a NATO agreement from June 2025 that set a target for defense and security spending of 5% of GDP by 2035. According to UBS, spending by European NATO members and Canada increased 19% in 2025 and is expected to rise a further 11% in 2026, to $634 billion.
The combination of a manufacturing-led pickup, stronger top-line revenue growth excluding energy, and expanding profit growth excluding energy underpins UBS’s constructive stance. The strategists argue these developments point to a recovery that is both broader across sectors and increasingly driven by demand dynamics rather than solely by cost management.
UBS’s recommendations and the data it cites provide investors with a set of tactical and thematic choices to consider as Europe’s earnings profile shifts. The bank’s four investment themes are framed as routes to capture exposure to both the cyclical upswing and longer-term structural change across the region.