UBS predicts pivotal year for UK and European stocks in 2026.

The recent positive performance of the FTSE 100 and European market indices like the DAX indicates a growing interest in European equities among investors. According to UBS, after years of stagnation, Europe is poised for a significant rebound in 2026, with the return of earnings growth being a key driver. Companies like Aviva, NatWest, RELX, and ITM Power have been singled out by UBS as top trades for the upcoming year.

UBS predicts a 7% increase in earnings per share for European stocks, slightly below the general analyst consensus of 10-11%. The positive outlook for Europe is based on factors such as policy support, attractive valuations, and improving investor sentiment. The analysts at UBS believe that European equities are set to enter a new phase in 2026, driven by domestic growth, fiscal stimulus, and increased investment in structural changes.

Regarding specific sectors, insurers are expected to perform well, with companies like Aviva and Admiral Group identified as top picks by UBS due to their solid cash flows and high dividend yields. Aviva, trading at 11 times 2026 earnings with a 5.5% yield, is seen as a strong contender in the market. Admiral, although slightly pricier at 13 times earnings, offers an attractive 7.3% yield. M&G, trading at 9 times next year’s earnings with a 7.5% yield, is also highlighted as a favorable option in the sector due to its defensive characteristics.

UBS is optimistic about European banks, expecting them to surpass their US counterparts in performance. The favorable conditions for European banks include accelerating loan growth, efficient cost management, and solid capital reserves. NatWest Group is another UK stock that stands out in UBS’s analysis, identified as a GOTCHA stock due to its alignment with emerging structural trends like electrification, renewables, and productivity improvements. Other UK companies to watch in this thematic mix include RELX, Sage Group, Breedon Group, and ITM Power.

Overall, the forecast for European markets in 2026 looks promising, with opportunities for investors in various sectors such as insurance, banking, and companies benefitting from thematic trends. With earnings growth expected to pick up and favorable market conditions, European equities are likely to have a successful year ahead.