UBS sees upside risks for its STOXX Europe 600 price target

UBS maintains its STOXX Europe 600 targets for 2025 and 2026, but identifies significant upside risks for the index, citing improving forward indicators, a broadening European economic recovery, and robust new order momentum. Despite subdued near-term earnings forecasts, the firm highlights supportive valuations and light investor positioning, suggesting the index is poised for potential outperformance as longer-term growth expectations take hold.

Analysis

UBS maintains its STOXX Europe 600 price targets at 550 for 2025 and 590 for 2026, representing 0% and 7% upside respectively, but signals a clear bias towards upside risk. This optimistic stance is underpinned by improving forward indicators, specifically a rising OECD composite leading indicator and an equity-weighted new order index reaching 52, its highest point since the 2022 energy crisis. Momentum is most significant in sectors like construction materials, industrial goods, machinery, and banks, which are positioned to benefit from European fiscal stimulus. This positive outlook contrasts sharply with subdued near-term earnings expectations, with UBS projecting just 1.5% sales growth and flat earnings growth for 2025. Sector performance is diverging, with upgrades in transportation and capital goods but persistent downgrades in tariff-sensitive areas like luxury and autos due to a stronger euro and US trade policies. Nevertheless, the brokerage suggests the market is supported by a reasonable valuation of approximately 14.5x forward earnings, which provides room for expansion as 2026 growth prospects improve. Furthermore, with investor positioning in Europe described as 'quite light,' potential net inflows could provide a significant tailwind for the index.

Key Decisions for Investors

• Consider rotating capital towards European sectors showing strong new order momentum and poised to benefit from fiscal stimulus, such as industrials, machinery, and banks, while exercising caution with tariff and FX-sensitive exporters like autos and luxury goods.
• Investors should recognize the disconnect between weak near-term earnings and positive forward indicators, suggesting a patient, longer-term approach is necessary to capture the potential upside, which is expected to materialize more fully in 2026.
• Given that investor positioning in European equities is 'quite light,' there may be a tactical opportunity to build positions in preferred sectors before a potential broader market rotation into the region occurs.
• Closely monitor the trajectory of forward-looking economic data, particularly new order growth and the OECD leading indicator, as these are the primary justification for the bullish outlook and their continued strength is critical for the thesis to hold against flat near-term earnings.