Here's how UBS recommends investing in European stocks

European equities are outperforming U.S. stocks in 2025, with the Stoxx 600 up over 7% compared to the S&P 500's 1.9% gain. UBS analysts cite undervalued European stocks, potential pro-growth policies in Germany, hopes for a Ukraine-Russia ceasefire, an improving manufacturing outlook, and EU-U.S. trade negotiations as catalysts. Defense, industrial, real estate, materials, chemicals, and automotive sectors could benefit, while firms in telecommunications, utilities, financials, and healthcare are poised to excel amid trade tensions; top UBS portfolio holdings include Allianz, AstraZeneca, Deutsche Telekom, Haleon, SAP, and TotalEnergies.

Analysis

European equities have demonstrated significant outperformance relative to their U.S. counterparts in early 2025, with the pan-European Stoxx 600 index advancing over 7% versus a 1.9% gain for the S&P 500. According to analysis from UBS, this trend is underpinned by several potential catalysts despite their overall "neutral" stance on the region. Key drivers include the relative valuation discount of European stocks compared to U.S. peers, anticipated pro-growth policies in Germany, and an improving manufacturing outlook. Geopolitical factors also play a crucial role, with hopes for a Ukraine-Russia ceasefire potentially lowering gas prices and boosting corporate profits, especially for the chemicals and automotive sectors. Furthermore, heightened security investments, including a possible increase in NATO's 2% defense spending target, are expected to benefit defense companies with stable earnings. UBS identifies specific sectors poised to capitalize on these trends: industrials, real estate, and materials could gain from German deregulation and tax cuts, while telecommunications, utilities, financials, and healthcare are noted for their resilience to trade tensions due to limited tariff exposure and strong pricing power.

Key Decisions for Investors

• Investors should consider a sector-focused strategy within European equities, potentially overweighting defense companies benefiting from increased security spending, as well as industrials and materials poised to gain from pro-growth German policies.
• Closely monitor geopolitical developments, as a potential Ukraine-Russia ceasefire represents a significant catalyst that could rapidly reduce energy costs and boost sectors like chemicals and automotive.
• Given the valuation gap and performance differential with the U.S., it may be prudent to re-evaluate regional allocations, prioritizing European firms with resilient characteristics such as stable earnings, solid pricing power, and low tariff risk found in the healthcare, utilities, and telecommunications sectors.