Daily Europe

18 August 2026, 04:40 UTC Chief Investment Office GWM Investment Research

European equities: Where to broaden out? UBS House View - Daily Europe Mark Haefele, Global Wealth Management Chief Investment Officer, UBS Switzerland AG Matthew Carter, Strategist, UBS AG London Branch Sacha Holderegger, CFA, CIO Equity Sector Strategist - Financials, UBS Switzerland AG Rolf Ganter, CFA, CIO Head of Europe Equities, UBS Switzerland AG Daisy Tseng, Strategist, UBS AG Singapore Branch Themis Themistocleous, Head Chief Investment Office EMEA, UBS AG London Branch

From the studio What to watch: 18 August Podcast: Signal over Noise with Ulrike Hoffmann-Burchardi. Listen on • UK June unemployment Apple or Spotify (6 mins) Video: The AI Show | China tech earnings update and what's next (3 • Germany ZEW Economic Sentiment Index for August mins) Video: Three reasons why we find Japanese equities attractive (6 mins) • US July housing starts Thought of the day Investors’ faith in the brighter outlook for European equities has led stocks to recent fresh highs. Evidence is mounting that the combination of cyclical improvement and large-scale structural investment we predicted is feeding more broadly through the economy and corporate earnings results. We still anticipate a meaningful earnings cycle that will exceed current market expectations, with around 25% earnings growth over 2026 and 2027.

But with lingering uncertainty in the US-Iran conflict, higher oil and gas prices, and with some major 10-year European government bond yields hitting highs last seen in 2009 last week, some investors appear to be broadening their sector exposure. Greater flows are heading into areas including financials, telecoms, and insurance.

We believe it is important to take a granular look at the sectors we rate Attractive and provide some commentary on why we hold Neutral ratings on some of the more “defensive” sectors that risk-conscious investors may be considering.

In the consumer sector, favor discretionary over staples. We rate consumer discretionary as Attractive thanks to price-to-book valuations trading close to cyclical lows, signs of an improving earnings outlook improving underpinned by stabilizing end-demand (specifically supportive US policy and high savings in the European Union and China) and evidence that corporate self-help efforts such as cost controls, restructurings, and the introduction of new product lines are bearing fruit. However, we rate the less growth-sensitive consumer staples sector as Neutral as sluggish sales volume growth and a lack of sector pricing power outweigh the positive of a seemingly attractive sector valuation.

In the financial sector, we prefer banks to insurance. We recently upgraded European banks to Attractive, as the sector is well positioned to

This report has been prepared by UBS Switzerland AG, UBS AG London Branch, UBS AG Singapore Branch. Please see important disclaimers and disclosures at the end of the document.

benefit from solid loan demand, elevated capital markets activity, and a stable rate environment that supports profitability. Second-quarter earnings results have reinforced our positive view, broadly exceeding expectations as around 80% of banks delivered earnings ahead of consensus. Eurozone lending increased by around 3% year-over-year, led by stronger corporate borrowing and recovering mortgage volumes. This points to improving credit demand despite geopolitical uncertainty. Looking ahead, we see further potential for gains from a broader European capex cycle, supported by fiscal investment, industrial reshoring, and spending on AI-related infrastructure such as data centers. Higher rates and hedging activities further support net interest income growth, while banks remain generally disciplined in terms of loan and deposit pricing. We rate insurers as Neutral despite the sector’s relatively good health and strong balance sheets, given elevated valuations versus history and slowing earnings upgrades given pricing weakness.

Our preferred “defensive” sector remains health care. We retain our Attractive rating on European health care. While US health care policy uncertainty weighed on the sector for most of…