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Investing.com -- UBS expects the FTSE 100 to grind higher through 2026 as earnings recover and the economic backdrop improves, though gains may lag profit growth after a period of valuation rerating.
The bank’s strategist Matthew Gilman points to reasonable valuations, supportive global policy, and an improving earnings trajectory as key pillars for the U.K. market next year. He sees a broader return profile ahead, shifting away from the handful of stocks that dominated performance this year.
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Earnings remain the central driver of the forecast. Profits have fallen about 15% over the past two years and are likely to contract slightly again in 2025. Gilman argues the market is now approaching a turning point, with the combination of policy clarity, lower rates, and softer energy prices set to lift demand.
He forecasts earnings to grow 5% in 2026 and around 15% in 2027.
“We believe we are on the cusp of an earnings recovery and expect growth to improve in 2026 as U.S. policy clarity, lower rates, and the drop in energy prices begin to support end-demand,” Gilman wrote in a note.
In its base case, UBS projects the FTSE 100 reaching 9,800 by June 2026 and 10,000 by year-end, compared with 9,510 in mid-November. The outlook reflects an assumption that the U.K. economy and corporate profits will gradually strengthen but that the index’s valuation gains earlier this year limit further upside relative to earnings.
The bank’s preferred positioning leans toward sectors tied to global secular growth drivers. Gilman highlights Industrials, IT, and Utilities as beneficiaries of trends including AI, data-center expansion, rising power demand and the energy transition.
UBS also adds a more cyclical tilt by upgrading European banks to Attractive, noting that valuations remain reasonable and the earnings outlook is supported by improving loan growth and asset repricing.
The firm outlines a range of potential outcomes as global and domestic conditions evolve. Its upside scenario sees the FTSE 100 rising to 10,800 by December 2026 if global growth improves more quickly, financial conditions ease, commodity prices strengthen and sterling weakens.
Gilman notes that 75–80% of FTSE 100 revenues come from outside the U.K., meaning a softer currency would lift reported profits.
The bank’s downside scenario places the index at 7,200, driven by risks such as a global downturn, persistently high inflation keeping rates elevated, falling commodity prices and a stronger pound.
Gilman flags the index’s exposure to commodity sectors—which account for roughly a quarter of FTSE 100 earnings—as a key vulnerability if pricing trends reverse.