UBS maintains a neutral stance on UK equities, arguing future gains must stem from earnings growth rather than valuation expansion. The FTSE 100 delivered a 22% return in 2025, but gains were narrow, driven by just 25 companies. The index now trades at a 9% premium to its 20-year average, limiting further multiple expansion.

The brokerage set a base case target of 10,500 for the FTSE 100 by December 2026, forecasting 5% earnings growth in 2026 and 15% in 2027. It noted the index’s defensive mix and structural headwinds from weak exposure to global trends like AI, likely causing underperformance versus more cyclical European markets like the Eurozone and Germany.

UBS sees an improving profit outlook supported by reasonable valuations and favorable global policy conditions. However, returns will likely lag earnings growth. The bank favors sectors like banks, industrials, and tech within Europe. Currency risk remains key, as 75%-80% of FTSE 100 revenue is generated outside the UK.