UBS stays Neutral on Eurozone equities, sees earnings growth recovery from 2026

UBS maintains a neutral stance on Eurozone equities, revising its 2025 earnings growth forecast downward to a 3% contraction from 0% growth, citing a weak Q2 earnings season and unfavorable currency movements that have contributed to the region's significant underperformance against other major markets. Despite this near-term downgrade and a recommendation for selective exposure, UBS projects an earnings recovery with 5% growth in 2026, driven by easing macroeconomic headwinds, supportive trade agreements, and structural catalysts like German infrastructure stimulus and increased EU defense spending, targeting modest upside for the Euro Stoxx 50 through mid-2026.

Analysis

UBS has adopted a neutral stance on Eurozone equities, reflecting a dichotomy between near-term headwinds and a more optimistic medium-term outlook. The firm has downgraded its 2025 Eurozone earnings growth forecast significantly, from 0% growth to a 3% contraction, attributing this revision to a lackluster second-quarter earnings season and adverse currency fluctuations. This earnings weakness is identified as a key factor behind the region's market underperformance, with the Stoxx 600's 5% price return since mid-2024 lagging U.S. and Asia ex-Japan markets by over 15%. However, looking ahead, UBS projects an earnings recovery to 5% growth in 2026, with further acceleration expected in 2027. This anticipated rebound is underpinned by easing headwinds, such as the new U.S.-EU and U.S.-Japan trade agreements, and long-term structural catalysts including German infrastructure stimulus and increased EU defense spending. The firm's price targets for the Euro Stoxx 50 — 5,500 by end-2025 and 5,600 by mid-2026 — suggest only modest upside, reinforcing a call for selective investment strategies.

Key Decisions for Investors

• Given the forecast for a 3% earnings contraction in 2025, investors should exercise caution with broad Eurozone exposure in the near term and consider underweighting the region relative to other global markets.
• Investors should adopt a selective approach, focusing on high-quality European companies in sectors like industrials, information technology, and real estate that are positioned to weather the current economic uncertainty.
• For those with a longer investment horizon, the current market stagnation could present an opportunity to gradually accumulate positions in anticipation of the projected earnings recovery beginning in 2026, driven by structural catalysts.
• The region's prospective 3.3% dividend yield should be considered a key component of total return, offering a supportive cushion against potential price volatility while waiting for a cyclical upturn.