SKN | UBS Maintains Positive European Equity View as Earnings Growth Offsets Higher Rates

Key Takeaways:

• UBS expects third-quarter earnings to show further improvement in European corporate profits despite higher interest rates and energy prices.
• The bank forecasts 15% earnings growth for the eurozone in both 2026 and 2027, supported by stronger revenue growth, cost discipline and improving currency effects.
• UBS continues to rate the eurozone Attractive, favoring information technology, industrials, banks, Germany and healthcare.
• The bank sees AI investment, electrification and defense spending as structural drivers that can offset some of the pressure from higher financing and energy costs.

UBS is maintaining its constructive view on European equities as the region approaches the third-quarter earnings season, arguing that improving corporate fundamentals can offset a more challenging environment of higher interest rates and energy prices. The bank expects earnings growth to remain strong as revenue becomes a larger contributor alongside established cost discipline.

UBS Sees Earnings Momentum Broadening

Matthew Gilman, head of European equity strategy at UBS Global Wealth Management’s Chief Investment Office, said revenues are becoming increasingly important to earnings growth, complementing the cost controls that have supported European corporate profitability. Currency movements are also shifting from a previous headwind toward a tailwind.

Recent economic indicators support UBS’s view. Strong global manufacturing PMIs in September and the German ifo survey point to resilient underlying demand. Against this backdrop, UBS forecasts 15% earnings growth for eurozone companies in both 2026 and 2027.

AI Investment Remains a Structural Support

UBS also sees continued investment in artificial intelligence as an important source of corporate demand. Gilman said AI investment currently appears more constrained by supply than financing, suggesting that higher borrowing costs have not yet materially disrupted the investment cycle.

The bank expects evidence that the benefits of AI are spreading more broadly across companies, building on trends observed during the previous earnings season. Higher energy prices could also strengthen the economic case for electrification and defense investment, two areas UBS views as relatively resilient to broader macroeconomic pressures.

Higher Rates Increase the Need for Selectivity

UBS is monitoring whether higher input costs and interest rates eventually begin weakening corporate demand or compressing margins. The risk is particularly relevant for consumer-facing businesses, where demand remains softer and pricing power is more limited.

For much of the market, however, UBS believes cost discipline and investment-led demand can offset those pressures. This supports the bank’s continued preference for selected areas rather than a broad-based increase in European equity exposure.

UBS Favors Technology, Industrials and Banks

UBS retains an Attractive rating on the eurozone and favors information technology, industrials, banks, Germany and healthcare. The bank also continues to recommend its “European leaders” and “Swiss mid-caps in focus” themes.

Consumer discretionary stocks have come under pressure from higher interest rates and oil prices, but UBS expects conditions to improve if energy flows stabilize. Even within the sector, the bank favors a selective approach, with its “Luxury & Lifestyles” theme positioned toward higher-end consumption that UBS expects to prove more resilient.

For UBS, the broader message is that higher rates and energy costs have raised the bar for European equities but have not fundamentally changed the earnings outlook. The coming reporting season will therefore be important in determining whether revenue momentum, cost discipline and structural investment trends can continue to support the bank’s constructive positioning.

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