European equities: UBS raises conviction ahead of Q2 results season, spotting selective upside amid modest 2025 earnings growth

UBS has sharpened its conviction in European equities as the second-quarter earnings season approaches, flagging that a subset of companies could outpace expectations even amid broadly modest guidance across the region. The updated UBS strategy for European equities signals that earnings growth in Europe for 2025 is expected to stay relatively modest, with full-year earnings growth revised down to about 2% due to ongoing tariff pressures and headwinds from currency movements. The firm notes that earnings growth in Europe has stagnated from 2022 through today, echoing a longer stretch of flat performance from 2010 to 2016. Yet, despite this backdrop, UBS remains constructive on the medium term, anticipating a return to earnings growth in 2026. Analysts believe the rebound will be driven by cyclicals that benefit from fiscal stimulus and a rebound in consumer spending, though near-term investor focus will be on quarterly surprises and forward-looking commentary. UBS’s cross-sector review identifies a distinct set of stocks positioned to deliver positive surprises and others where prudence is warranted, highlighting the nuanced, bottom-up nature of the bank’s tactical view.

UBS’s Updated Strategy for European Equities: Key Drivers and 2025 Outlook

UBS’s latest strategic update on European equities emphasizes a disciplined, stock-specific approach as the earnings season looms. The bank’s central prognosis is that, even in a milieu of moderate macro momentum, selective outperformance is attainable if companies demonstrate resilience, cost discipline, and earnings dynamics that defy the prevailing caution baked into consensus forecasts. The 2025 full-year earnings growth forecast for European corporates has been revised lower to approximately 2%, driven primarily by the persistent drag from tariff pressures and adverse currency movements. This adjustment signals a shift from an earlier, perhaps more optimistic assumption about European profitability, aligning UBS’s expectations with the subdued real-time macro backdrop that has characterized much of the last several quarters.

The diagnostic narrative UBS presents is careful and grounded in observed data: earnings growth for Europe has largely stagnated since 2022, with little to no material improvement through today. This pattern mirrors a longer era of steadier performance between 2010 and 2016, when European earnings displayed a more stable, predictable trajectory even amid cyclical fluctuations. The implication of this historical comparison is that today’s earnings path is less about a rapid rebound and more about steady, selective advancement that emerges as structural cost controls and sector-specific drivers come into play. In their model, a genuine, broad-based macro rebound is not a prerequisite for meaningful alpha; instead, the focus is on granular earnings dynamics that can outpace expectations inside pockets of the market.

Nonetheless, UBS remains constructive on the medium term. The bank’s scenario envisions a gradual return to earnings growth in 2026, underpinned by a reacceleration in sectors that are cyclically sensitive and responsive to fiscal stimuli, along with a rebound in consumer spending that supports discretionary and non-discretionary demand alike. This perspective does not hinge on a macro-wide uplift, but rather on a more nuanced earnings comeback that is driven by sector-specific catalysts and company-level execution. The implication for investors is a shift toward identifying beasts of the circle within the European equity market: firms that keep a tight rein on costs, exhibit operational resilience, and can leverage sector-specific tailwinds even when the macro environment remains challenged.

In practical terms, UBS’s 2025 earnings growth revision to 2% underscores the environment of modest profit expansion rather than explosive upside. Yet the firm stresses that this backdrop does not erase the potential for stock-level outperformance. Rather, the emphasis is on identifying companies with earnings resilience and credible pathways to beat or reaffirm guidance, even when consensus expectations are modest. This approach integrates a bottom-up, sector-aware lens with a quantified assessment of earnings positioning, which aims to separate those names that can surprise positively from those where the risk of downside or disappointment remains higher.

The strategic framework also recognizes that the earnings season itself will act as a real-world stress test for the “Case for Europe.” In UBS’s view, the market could respond positively to even modest earnings upside or to confirmations of guidance that point to a sustainable trajectory beyond the current year. This is particularly relevant given the current setting of relatively low expectations for the quarter, which increases the likelihood that small positive surprises have outsized market impact. The key takeaway is that the earnings narrative for Europe is likely to be driven more by selective stock-specific developments and management commentary than by a broad macro-driven rally.

In terms of structural versus tactical dynamics, UBS emphasizes that the conviction upgrade is a tactical stance rather than a fundamental shift in the macro narrative. The firm argues that while global growth may remain hard to pin down this year, outperformance will likely come from companies that maintain disciplined cost controls, show resilience in operations, and exhibit dynamics that are specific to their sectors. In this sense, the more subtle, granular drivers of profitability take center stage, with long-run earnings quality and margin discipline becoming the focal points for identifying potential winners.

To summarize this section, UBS’s updated view suggests that 2025 earnings growth in Europe is constrained by tariffs and currency moves, registering around 2% for the full year. However, the firm remains constructive on the medium term, anticipating a return to earnings growth in 2026 driven by cyclicals and a rebound in consumer expenditure. The emphasis is on a bottom-up, stock-specific approach where a handful of names could deliver positive surprises even within a market that is broadly cautious about the near term. Investors are encouraged to watch not just headline numbers but also forward-looking commentary and qualitative guidance that could validate the earnings trajectory under the anticipated scenarios.

Stock Picks: The Cross-Sector Review and How UBS Identifies Potential Surprises

A central component of UBS’s European equities strategy is a comprehensive cross-sector assessment designed to identify companies that could outperform the consensus outlook. The bank’s analysts conducted an intersectoral review to pinpoint the stocks most likely to deliver results that surpass expectations, as well as those where the risk of underperformance remains elevated. The outcome of this process identified 21 companies as positioned to deliver positive surprises and 10 where a cautious stance would be prudent. These selections are not random; they rest on a blend of sector-specific earnings forecasts and UBS’s quantitative research intensity scores, which quantify the degree to which investor positioning and expectations are baked into the price.

The emphasis on 21 potential positive surprises reflects a belief that the market can re-rate favorable earnings news even when the overall earnings backdrop is modest. The argument rests on the idea that a handful of firms can demonstrate outsized earnings leverage or margin discipline that translates into earnings beats relative to consensus. In a scenario where expectations for the quarter are already subdued, even modest positive deviations from forecasts can generate outsized market reactions, as investors re-price the growth and earnings quality embedded in those shares. This is part of UBS’s broader view that selective, stock-specific catalysts can drive relative outperformance in a market where the broader macro backdrop remains uncertain.

On the other side of the coin, UBS has flagged 10 companies where prudence is warranted. The cautionary list recognizes that certain earnings trajectories could disappoint given sectoral headwinds, company-specific challenges, or the risk that management guidance may not convincingly translate into sustained earnings momentum. The aim of this dual framework is to guide investors toward those opportunities with the strongest risk-adjusted reward while acknowledging the names where the risk-reward balance is less favorable in the near term.

The methodology behind these selections combines forward-looking earnings forecasts that are tailored to each sector with UBS’s quantitative research intensity scores. These scores measure the extent to which investors have positioned themselves in anticipation of earnings releases, including the degree of long or short exposure and the concentration of investment. By marrying bottom-up earnings strength with an assessment of how well-positioned investors are to capitalize on that strength, UBS attempts to surface the stocks with the most compelling likelihood of delivering outsized returns in a quarter that could otherwise disappoint.

A key implication of this framework is that even small earnings beat or modestly better-than-expected guidance can trigger meaningful market responses, precisely because the baseline expectations are relatively modest. For investors, this means that the earnings season could offer selective entry points into European equities where the risk-reward balance is favorable and where management commentary could unlock a different narrative for 2026 and beyond. The potential for re-rating hinges less on a broad macro rebound and more on the ability of specific companies to demonstrate disciplined execution and clear earnings pathways in a challenging environment.

Within the broader market context, UBS also notes that any forward-looking commentary on 2026 could prove particularly well-received by investors. The capacity to outline a credible, executable plan for earnings growth beyond the near term would likely be interpreted as a meaningful signal by the market, reinforcing the stock-specific case for Europe even when 2025 earnings growth remains constrained. This nuance—focusing on the quality and trajectory of earnings rather than merely the level in the current period—reflects a tactical emphasis on the durability of corporate resilience and the potential for selective optimism where it is warranted.

In essence, the stock-picking framework reflects a deliberate, multi-faceted approach: a willingness to embrace a handful of names with credible upside while maintaining a prudent stance on those with more uncertain earnings trajectories. The approach is designed to help investors navigate a European equity market that, while attractive on valuations in some corners, remains tethered to a cautious earnings environment. The ultimate objective is to identify the names with meaningful, near-term catalysts that can drive positive surprises and, over time, contribute to a more robust earnings trajectory heading into 2026.

Market Sentiment, Tactical Shifts, and the Path to 2026

UBS emphasizes a distinction between tactical adjustments in sentiment and broader, structural shifts in the European equity market. The firm’s view is that, although global growth may remain elusive this year, a selective leadership group could emerge based on company fundamentals rather than widescale macro optimism. The constructive, but not exuberant, tone reflects a recognition that the market is likely to reward execution and earnings quality more than macro-driven upside at least in the near term. The emphasis on earnings discipline and sector-specific resilience underlines the belief that a non-broad-based improvement in earnings can still fuel meaningful outperformance.

The strategic takeaway is that the near-term upside is driven by bottom-up dynamics rather than a sweeping macro rally. Companies that can tightly control costs, optimize their operational processes, and navigate sector-specific cycles are considered the most likely to outperform. This is a nuanced view that prioritizes earnings quality and profitability dynamics over broad macro optimism. In this sense, UBS’s conviction is “case-by-case” rather than “all boats rise with the tide,” which positions investors to benefit from idiosyncratic strengths within the European market.

In the longer horizon, UBS maintains its expectation of a rebound in earnings growth by 2026. This outlook is predicated on the anticipated reacceleration in cyclicals and a recovery in consumer spending, which would help to lift earnings across a broader swath of the market. The firm also notes that even in the absence of a strong macro backdrop, a number of companies could catalyze a re-rating process as they demonstrate healthier margins and more efficient capital allocation. Thus, the path to 2026 is framed as a two-step process: first, the identification of firms with robust bottom-up earnings trajectories and, second, the market’s re-pricing of those earnings in light of improving corporate fundamentals.

From an investor engagement perspective, the narrative suggests that attention will center on forward-looking guidance and indicators of earnings power that extend beyond the current quarter. Investors will be looking for visibility into 2026 and beyond to gauge whether the implied earnings path is realistic given existing macro constraints. In this context, even modest improvements in earnings visibility or constructive commentary on the durability of earnings quality could be meaningful catalysts for stock-specific upside. The strategic emphasis on 2026 visibility reflects a belief that the market rewards clarity and credible forward guidance as much as, if not more than, near-term earnings beats.

Finally, the overarching takeaway is that UBS’s conviction is anchored in granular earnings dynamics rather than a macro-wide rebound narrative. This emphasis on micro-level factors—such as cost controls, operational resilience, and sector-specific momentum—reflects a sophisticated approach to navigating a market where macro signals remain ambiguous but where well-executed, earnings-led strategies can still generate meaningful outperformance. The forthcoming earnings season will serve as a live test of this approach, offering the potential for selective gains anchored in robust bottom-up analysis and prudent risk management.

The Upcoming Earnings Season as a Decisive Test for Europe

Looking ahead to the next earnings season, UBS views the results as a crucial testing ground for the strength and plausibility of the “Case for Europe.” The firm argues that, even in an environment of cautious sentiment, valuations across parts of the European market remain attractive on a selective basis. The probability of a positive market reaction hinges on a combination of modest earnings upside, confirmatory guidance, and evidence of operational discipline that supports a credible path toward 2026 earnings growth. This framework underscores the importance of not only what companies report in the quarter but also how management frames the next several quarters and the longer-term earnings trajectory.

From a practical standpoint, investors should pay particular attention to:

• The pace and drivers of cost containment across different sectors, and whether these efforts translate into margin stability or improvement.
• The degree of resilience in operational performance amid softer demand or currency headwinds, and the evidence of structural efficiency gains.
• The specificity of forward-looking commentary—whether management provides concrete plans and realistic targets for 2026 and beyond.
• The magnitude of earnings surprises relative to consensus forecasts, and the market’s response to any guidance upgrades or downgrades.

UBS’s cross-sector review reinforces that a significant portion of potential outperformance is concentrated in a relatively small set of names that can deliver outsized beats or upgrades despite modest macro expectations. Investors who can identify these names and align them with the earnings trajectory into 2026 may benefit from a favorable risk-reward balance, particularly as markets reassess valuations in light of improving company fundamentals.

In sum, the upcoming earnings season is seen as a pivotal moment for Europe. It is expected to influence the market’s perception of the regional growth story and to determine whether the selective, earnings-led approach can sustain outperformance in an environment where macro drivers are uncertain. The emphasis remains on granular, company-level dynamics that can translate into credible earnings paths and, ultimately, a more confident case for the long-term profitability of European equities.

Conclusion

As the European earnings season approaches, UBS reinforces its refined, stock-by-stock view of the region’s equities, arguing that a measured, fundamentals-driven approach can yield meaningful alpha even as broad earnings growth remains modest in 2025. The revised 2025 EPS growth forecast of around 2% reflects persistent tariff pressures and currency headwinds, while the medium-term outlook remains constructive with a projected return to earnings growth in 2026—driven by cyclicals, fiscal stimuli, and a rebound in consumer spending. The bank’s cross-sector work identifies a clear set of names positioned to beat expectations and a smaller set where caution is warranted, underscoring the importance of bottom-up analysis in a market where macro optimism is hard to come by.

Investors should watch for earnings surprises and forward-looking guidance that could unlock selective upside, particularly for those firms that demonstrate disciplined cost management, resilient operations, and sector-specific momentum. While the near-term sentiment may be cautious, valuations in the right corners of the European market could offer compelling opportunities for a measured, earnings-focused strategy. The forthcoming earnings season will serve as a decisive test for the Case for Europe, with the potential for a strategic re-pricing of stocks that prove their earnings trajectory aligns with UBS’s measured, tactical framework for 2025 and beyond.