UBS projects that UK shares will underperform Eurozone equities in 2026, despite the FTSE 100 delivering a strong 22% gain in 2025. The firm attributes its outlook to valuation levels that it views as extended, and to the concentrated nature of last year’s rally, according to a note published on Monday.
The gain in the FTSE 100 during 2025 outpaced both the Eurozone and U.S. markets, but UBS strategist Anthi Tsouvali noted the advance was driven by a limited group of companies and four clear sectoral drivers.
Banks were the primary engine of the rally - supported by resilient earnings and a pronounced rerating that lifted sector valuations. Pharmaceuticals posted a recovery as uncertainty over U.S. healthcare policy abated, while defence-related firms benefited from rising European defence spending priorities. Mining stocks also contributed materially to returns, bolstered by higher prices for gold, silver and copper.
UBS warned that broader UK macro conditions remained a drag through 2025. The bank highlighted subdued economic growth and inflation that stayed elevated for much of the year. In response, the Bank of England cut interest rates on a quarterly basis, though UBS characterises the overall stance of monetary policy as still restrictive.
Given those dynamics, UBS said a significant portion of the positive market momentum now appears priced into UK equities, with valuations sitting above historical averages. The firm believes that future total returns for UK stocks will be heavily dependent on earnings growth - and that earnings improvement is conditional on a rebound in global economic conditions.
For 2026, UBS prefers Eurozone equities to UK stocks. The brokerage cited marginally stronger growth expectations and comparatively more attractive valuations across the Euro area. It also pointed to a structural backdrop that it views as supportive - including increased fiscal commitments from Germany and NATO - combined with the prospect of a cyclical recovery.
After a prolonged manufacturing downturn, activity in the Eurozone has stabilised, UBS said, which in its view helps set the stage for renewed growth. The region’s substantial exposure to global manufacturing is presented as a positive for an improving cycle, with valuations still reasonable relative to historical norms.
UBS identified Germany as a market likely to benefit from higher fiscal spending, and it pointed to opportunities across multiple sectors there, including banks, information technology, industrials, utilities and real estate. The brokerage also highlighted two thematic ideas for investors: "European Leaders," meaning companies positioned to gain from structural changes within Europe, and Swiss high-quality dividend stocks, which it describes as offering steady returns and defensive traits.
Note: The projections and sector observations above reflect UBS’s published analysis and the factors it identified as driving recent market outcomes and prospective performance.