UBS views U.K. equities as fairly valued and anticipates earnings growth over the next two years, but the firm expects the overall upside to lag that of global equities.
According to Matthew Gilman, CIO Equity Strategist at UBS Switzerland AG, the FTSE 100 is changing hands at a forward price-to-earnings multiple of 12.7x, which is close to the index's median forward P/E of 12.8x recorded since 1990. UBS's updated earnings outlook reflects material shifts in energy prices and sector dynamics.
UBS has raised its earnings-growth forecast for the current year to a range of 9-10%, up from a prior estimate of 5%, a revision the bank attributes to the boost from higher oil prices. For 2027, UBS now expects a similar 9-10% earnings expansion, reduced from an earlier projection of 15% as the firm assumes oil prices will moderate even as growth in other sectors accelerates.
On price targets for the headline index, UBS has set a June 2026 target of 10,300 and a December 2026 target of 10,500. The FTSE 100 was at 10,046 on Wednesday.
UBS identifies three dominant themes shaping U.K. equity performance this year. First, the cyclical outlook has improved, with global manufacturing purchasing managers' indices rising to multi-year highs. Second, investors have been rotating away from digital businesses toward more tangible, physical sectors amid concerns over disruption from artificial intelligence. Third, heightened tensions in the Middle East have elevated worries about energy security, which has in turn altered relative sector performance.
While the U.K. market is generally less cyclical than many peers, that lower cyclicality has recently worked in its favor as geopolitical tensions have raised doubts about future growth trajectories. The rotation into physical assets has also benefited U.K. stocks, and the market's sizeable oil and gas sector has been an advantage amid rising energy prices.
In UBS's base case, where any disruptions to energy supply prove relatively short-lived, the bank believes cyclical markets that have underperformed most recently could offer greater upside. UBS also warns of the risk that the recent rotation away from digital names toward physical assets could partially reverse if investors grow more selective about AI-related disruption.
UBS notes that even if oil prices move higher, energy equities may not keep pace. The firm points to a recent decoupling between oil prices and energy-stock returns, observing that MSCI UK Energy in U.S. dollars has risen 28% while the Brent oil price is up 16% over the same interval.
Regionally, UBS favors market exposures that combine secular growth with limited vulnerability to energy shocks. The bank has upgraded European health care to "attractive," highlighting that the sector is down more than 10% since the start of the conflict despite typically being less volatile, leaving valuations relatively appealing. UBS notes that tariff uncertainty and questions over U.S. drug pricing weighed on the sector last year but are largely in the rear-view mirror, and that the profit headwind from a weak U.S. dollar is easing.
UBS also continues to prefer European information technology and European industrials. The bank reasons that these sectors could profit if the geopolitical situation stabilizes and growth risks abate, while also offering resilience given exposure to drivers such as memory demand, electrification, re-shoring of manufacturing, and higher defense spending. Real estate remains on UBS's list of attractive exposures, driven by what the firm sees as favorable valuations.
Currency and the energy weight of the index are additional considerations for U.K. equity returns. With an estimated 75-80% of FTSE 100 revenues generated outside the United Kingdom, a reversal of recent sterling strength could support improved returns in local currencies. Meanwhile, the oil and gas sector's large weighting in the index - contributing around 20% of FTSE 100 earnings - remains an important determinant of market performance.
Overall, UBS frames U.K. equities as reasonably priced with constructive earnings trends but expects relatively muted upside versus more cyclical markets that have shown greater weakness recently. The bank's sector preferences skew toward defensive secular-growth exposures and cyclically sensitive areas that could benefit from a normalization in geopolitical and growth risks.