Energy Concerns Fade, Profits Rise: UBS Bullish on European Stocks

Investing.com — UBS has raised the target for the Euro Stoxx 50 Index from the current 5,587 points to 6,400 points in June 2026 and 6,600 points in December 2026, forecasting that corporate earnings in the Eurozone will recover after three consecutive years of stagnation.

Get faster news and analyst reactions with InvestingPro — 50% off

The broker predicts that, driven by a rebound in manufacturing activity, controlled core inflation, clearer trade tariffs, and support from global monetary and fiscal policies, Eurozone earnings will grow 7% in 2026 and 18% in 2027.

UBS rates Eurozone stocks, especially the Euro Stoxx 50 Index, as “attractive” within its global asset class preference framework.

The broker notes that three forces are shaping the European stock market in early 2026: a strengthening cyclical outlook with manufacturing PMI reaching multi-year highs and solid Q4 earnings; concerns over AI-driven disruptive impacts causing rotation from digital to tangible sectors; and escalating tensions in the Middle East raising energy security worries.

Regarding energy risks, UBS differentiates this from the 2022 Russia-Ukraine shock when Russian gas accounted for 35-40% of EU gas consumption.

The Middle East accounts for only 4% of EU gas consumption, and unlike 2022 — when central banks adopted aggressive rate hikes to combat post-pandemic inflation — UBS expects central banks to “ignore this seemingly temporary energy supply shock.”

“Disruptions in the Middle East are expected to eventually recover,” the broker states, adding that European consumers have high savings rates, companies have improved energy efficiency since 2022, and governments retain tools to support households, citing Germany’s current budget energy cost support.

UBS’s regional sector preferences include information technology, industrials, real estate, and Germany, along with its “European Leaders” theme, targeting companies that benefit from global trends and structural shifts.

The broker has downgraded bank stocks to “Neutral,” citing a more balanced risk-reward after recent strong performance and early signs of profit upgrade slowdown.

In an optimistic scenario, UBS sets the December 2026 target for the Euro Stoxx 50 Index at 7,100 points, assuming that fiscal policies in Germany, EU defense spending, easing of natural gas prices through a Russia-Ukraine peace deal, further rate cuts, or structural reforms (including progress on the EU savings and investment union) accelerate European growth.

It also mentions that diversified investments by US and Asian capital could narrow the valuation gap between European and US stock markets.

In a downside scenario, the December 2026 target drops to 4,400 points, with risks including prolonged energy disruptions delaying economic growth and US rate cuts, disappointing AI investments, renewed US-EU trade tensions, increased Chinese competition, or a return of political uncertainty in Europe.

This article was translated with the assistance of artificial intelligence. For more information, please see our Terms of Use.