UBS downgrades the UK stock market rating to neutral, believing the upside is limited.

Investing.com - UBS has downgraded its outlook for the UK stock market to neutral, citing limited upside potential compared to global markets despite reasonable valuations and expected earnings growth.

According to the latest research released by UBS’s Chief Investment Office on Thursday, the FTSE 100’s forward P/E ratio is currently 13.5, slightly above the median of 12.8 since 1990. The bank expects UK corporate earnings to grow by 5% in 2026 and 15% in 2027.

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Matthew Gilman, a stock strategist at UBS Switzerland’s Chief Investment Office, said that this year’s UK stock market has been influenced by three main forces: an improving cyclical outlook with global manufacturing PMI reaching multi-year highs; concerns over AI-driven disruption causing rotation from digital to tangible sectors; and escalating Middle East tensions raising energy security worries.

UBS has set a target of 10,500 points for the FTSE 100 in December 2026, compared to the current level of 10,320 as of Tuesday. The bank’s forecast for June 2026 is 10,300 points.

This Swiss bank has adjusted its European sector preferences, downgrading the European banking sector to neutral after recent strong performance and early signs of profit revision slowdown.

UBS remains optimistic about Europe’s information technology, industrial, and real estate sectors, which benefit from structural trends including memory demand, electrification, reshoring manufacturing, and increased defense spending.

In an optimistic scenario, UBS believes that if global growth improves more rapidly supported by loose financial conditions and improved confidence, the FTSE 100 could reach 11,300 points by December 2026.

Rising commodity prices and a weaker pound could also boost the UK stock market, as 75% to 80% of the FTSE 100’s revenue comes from outside the UK.

However, the bank also outlines a downside scenario where prolonged disruptions to Middle Eastern energy supplies lead to economic weakness, with a target of 7,200 points, potentially delaying rate cuts in the US and UK.

Re-emerging US-Europe trade tensions or falling commodity prices could also weigh on performance, as the commodities sector contributes about 20% to 25% of the FTSE 100’s earnings.

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