Investing.com -- UBS is forecasting a challenging year ahead for European equities, projecting nearly 9% downside risk for the Stoxx 600 index by the end of 2025.
Specifically, the bank’s strategists expect the index to drop to 470, which is around 8.91% lower compared to the current levels. The outlook reflects weak earnings, deteriorating margins, and persistent macroeconomic headwinds and marks a third consecutive year of stagnation for European stocks.
The bank anticipates a 5% contraction in earnings per share (EPS) for the Stoxx 600 next year, following two years of flat growth as margins weaken.
“We expect negative earnings growth as margins contract more than sales grow. Valuations are roughly the right level,” strategists led by Gerry Fowler said in a Wednesday note.
“Valuations continue to track discount rates fairly and we see modest upside next year.”
China’s economic deceleration is among key concerns, as it continues to weigh on sectors such as autos, luxury goods, and chemicals that rely heavily on Chinese demand. UBS expects European companies in these industries to face increasing pressure from both weakening domestic consumption in China and growing competition in global markets.
The recent re-election of President Trump further complicates the outlook. The bank notes that proposed US trade and regulatory policies could amplify risks for European corporates, particularly in sectors like renewables, banks, and industrials.
On policy, strategists expect the European Central Bank (ECB) to cut interest rates to 2% in 2025, providing a “very modest” support to GDP growth. “This may help the consumer sectors that we think will be among the most resilient in 2025,” strategists noted.
Meanwhile, broader fiscal tightening across key European economies, including France and Italy, is expected to serve as a headwind, offsetting some of the gains from monetary easing. However, UBS points out that this “helps contain risk premia.”
“There is an outside chance that Europe more assertively implements a 'change' agenda, which could unlock more growth and value than we forecast,” the bank added.
Sector-wise, UBS favors defensive plays such as utilities and renewables, citing stable earnings growth and attractive valuations. The bank is also optimistic about consumer staples and select UK-focused stocks, reflecting a relatively resilient UK economy.
On the other hand, cyclical sectors, including semiconductors, mining, and energy, are expected to struggle. Financials face a mixed outlook, with insurers benefiting from robust capital returns while banks remain vulnerable to macroeconomic and regulatory risks.