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UBS expects European companies to post further profit improvement in the third-quarter earnings season and is maintaining its positive view on eurozone shares, despite higher interest rates and energy costs. In a report published October 7, Matthew Gilman, head of European equity strategy at UBS Global Wealth Management’s Chief Investment Office, said stronger revenue contributions and disciplined costs underpin the outlook.
The bank forecasts eurozone earnings growth of 15% in both 2026 and 2027. Its call comes as rising inflation and borrowing costs put pressure on European bond markets and raise questions about whether demand and profit margins can withstand higher input expenses.
Revenue growth and cost control support the outlook
Gilman said revenue is becoming a more important driver of earnings alongside cost discipline, while currency effects are shifting from a drag to a tailwind. UBS also cited stronger September global manufacturing purchasing managers’ indexes and Germany’s ifo business survey as indications of underlying demand.
The forecast depends on those supports holding up as companies face higher operating costs. UBS said it is monitoring whether more expensive inputs and interest rates begin to erode demand or margins, with consumer-facing businesses particularly exposed where demand is soft and companies have limited ability to raise prices.
The strategy view is not that every sector will be insulated. Rather, UBS argues that cost control and investment-related demand may offset some pressure for many businesses, while the vulnerability of consumer companies makes sector and stock selection important.
AI and investment themes feature in UBS’s case
Gilman said investment in artificial intelligence appears more constrained by the availability of supply than by financing, and UBS expects further signs that AI-related benefits are spreading beyond a narrow group of companies. The strategist said the broadening was evident in the previous quarter, without naming specific beneficiaries in the report.
UBS also sees elevated energy prices as reinforcing the case for investment in electrification and defense. The bank considers those areas relatively resilient to broader macroeconomic concerns, though its report did not quantify the expected earnings contribution from either theme.
The sector preferences UBS identified within the eurozone include information technology, industrials, banks and health care. It also highlighted Germany, and recommended investment themes it calls “European leaders” and “Swiss mid-caps in focus.”
Rates and energy create risks for consumers
Higher rates can weigh on companies through financing costs and may also make consumers more cautious. Expensive energy presents an additional cost and demand risk, particularly for households and businesses exposed to fuel and power bills.
UBS said consumer discretionary shares had fallen amid rising interest rates and oil prices. Gilman expects the sector could recover if the outlook for energy flows improves, but the bank urged selectivity rather than treating all consumer businesses alike.
Within consumer spending, UBS favors higher-end demand through its “Luxury & Lifestyles” theme, which Gilman expects to be more resilient than other parts of the sector. That is a relative assessment, not a claim that luxury companies are immune to weaker demand or higher costs.
UBS maintains its positive stance amid market strains
In a separate weekly outlook dated October 5, UBS said European government bonds had faced pressure from accelerating inflation, fiscal concerns and widening sovereign spreads. The bank reported that eurozone headline inflation rose to 3.8% year over year in September from 3.2% in August, while core inflation edged up to 2.5% from 2.4%.
Despite those pressures, UBS said it remained positive on eurozone equities, citing an improving earnings cycle, resilient activity, structural investment and valuations it considers reasonable. The firm’s October 7 earnings outlook is consistent with that position, but it does not remove the risks the bank identified around energy costs, interest rates and consumer demand.
Upcoming third-quarter results will offer a test of UBS’s expectations as companies report how revenues, currencies and cost control affected performance. The available report does not specify a calendar for individual company results or give a revised price target for a European stock index.
