Global Strategy Europe 2H 2026 Outlook: Harvest Carry, But Prepare for Dispersion

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Global Strategy Europe 2H 2026 Outlook: Harvest Carry, But Prepare for Dispersion

price volatility and inflation uncertainty. Additionally, even as Middle East Strategist

tensions and inflation pressures have faded, UBS’ composite supply chain stress mustafa.caylan@ubs.com

indicator remains elevated. Despite this, credit markets have proved resilient in the face +44-20-7901 5203

of these risks. Even as markets reached peak pricing for Fed hikes at the beginning of the Bhanu Baweja

conflict, EU/US HY credit spreads widened by just ~40bp and are now tighter than pre- Strategist

conflict levels. We think that the risk of broad-based spread widening from a resumption bhanu.baweja@ubs.com

in Middle East tensions remain limited from here, unless we see long-term inflation +44-20-7568 6833

expectations rise meaningfully or central bank rate hike pricing re-test the highs. At the

same time, we see some sectors as vulnerable if Middle East tensions or inflation

pressures resume, notably: Airlines, which outperformed as we expected as energy

prices normalized but now look rich; REITs, given their sensitivity to higher rates; and

select Cyclicals.

3. A two-speed economy, with fiscal optimism running ahead of fundamentals

One of the key idiosyncratic debates for Europe in H2 is whether long-awaited fiscal

stimulus will finally translate into stronger growth. Three points stand out: (1) Balance

sheet health remains materially stronger than in the US, except in B/CCC, where signs of

deterioration have emerged, revealing a clear gap between resilient higher-quality

issuers and weaker lower-rated cohorts. (2) German fiscal stimulus remains a timing risk,

with infrastructure spending yet to show meaningful traction, both IFO and PMI civil