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Investing.com -- UBS reiterated a neutral view on eurozone equities, maintaining a cautious stance amid persistent near-term risks while recommending selective exposure.
While several positive policy developments have improved the medium-term outlook, the bank warns that the region continues to face challenges, including "slowing growth/trade uncertainty, currency headwinds, the end of ’good’ ECB rate cuts, low gas storage levels, and potentially challenging budget discussions in the coming months."
UBS forecasts no earnings growth for 2025 and 5% growth for 2026, both below consensus expectations of 2% and 12%, respectively. It views a stronger recovery likely only from 2027, driven by fiscal stimulus effects, resilient consumer spending, and potential improvements in global manufacturing.
However, UBS analysts caution that “it is too early to look that far ahead, given the near-term outlook for growth remains highly uncertain.”
Valuations remain elevated relative to historical averages, with forward price-to-earnings (P/E) multiples standing at 14.3 times, representing a 5-10% premium. This valuation backdrop adds to downside risks should earnings fail to meet expectations.
Despite these concerns, UBS sees opportunities for selective investments, particularly in higher-quality businesses positioned to benefit from structural growth themes and European policy shifts.
"We favor selective exposure to the region, and recommend using pullbacks as opportunities to phase into European equities," the strategists wrote. The bank’s preferred sectors include IT, industrials, and real estate.
The report also highlights that fiscal and political developments remain in focus. Germany’s spending plans are expected to be approved by autumn, though upcoming debates may generate negative headlines.
Similarly, French budget negotiations and pension reforms could elevate political uncertainty.
Meanwhile, UBS notes that failure to progress in Russia-Ukraine talks could lead to higher energy prices as Europe rebuilds gas inventories following a colder-than-usual winter.
In its central scenario, UBS projects the Euro Stoxx 50 to end 2025 at 5,200, rising to 5,600 by mid-2026.
Under its upside scenario, the index could reach 6,000 if trade deals, policy responses, and geopolitical resolutions materialize.
Conversely, the downside scenario suggests a fall to 4,000 should global trade tensions escalate, energy costs rise, or political uncertainty increase.