London Calling – New momentum for the UK stock market?

The UK is starting 2026 with renewed confidence. Improved economic data, a noticeable improvement in business sentiment and the surprisingly significant fall in inflation are fueling hopes of an economic upturn over the course of the year.

At the same time, confidence is growing on the financial markets that interest rate cuts in the near future could provide additional impetus. In line with this, the UK stock market has been in strong shape so far in 2026.

British companies optimistic

Business sentiment in the UK has recently seen an unexpected upturn. S&P Global’s Purchasing Managers’ Index (PMI) rose by 0.2 points to 53.9 points compared to the previous month, even more clearly above the 50-point mark at which growth is indicated.

The data for February provides further evidence of a promising start to the new year for the UK economy, said S&P chief economist Chris Williamson. The latest forecast by the Bank of England predicts economic growth of 0.9 per cent for this year, while the International Monetary Fund (IMF) expects growth of 1.3 per cent.

Brexit is still leaving its mark

After a weak final 2025 quarter, the UK economy has a more optimistic outlook again, according to the S&P survey. While the UK gross domestic product (GDP) grew by 1.3 per cent overall in 2025, clearly outperforming France and Germany, growth slowed significantly towards the end of the year.

Recently, the country’s economy has suffered both from its own problems and from the international environment. With the war in Ukraine, trade conflicts and newly formed power blocs, the UK must redefine its role and find new partners. In addition, economists believe that Brexit is still negatively impacting the economy.

GDP stagnated recently, exports continue to decline

In Q4, gross domestic product stagnated again, growing by only 0.1 per cent. While the service sector remains stable according to data from the UK Office for National Statistics, growth was primarily dampened by low manufacturing output. UK companies are facing increasing international competition, and this is also reflected in the trade balance. Exports have declined steadily over the past four years, particularly to the US.

In addition, UK domestic companies have been facing higher costs and taxes, with the government planning further extensive tax increases for this year. According to the Office for Budget Responsibility, the measures are expected to yield an estimated GBP 26.1bn (EUR 29.7bn) annually for the treasury by the 2029/30 tax year. In the past two years, around 6,000 entrepreneurs have left the country due to the high taxes and concerns about the location’s profitability, the Financial Times recently wrote in referral to a corresponding study. According to the study, the United Arab Emirates in particular is currently attracting many British entrepreneurs.

Note: Prognoses are not a reliable indicator of future performance. Data as of 24.2.2026

Hope for interest rate cuts

The British labor market has also been weak recently. The unemployment rate rose to 5.2% in the fourth quarter of 2025. This is the highest figure since 2015, excluding the period of the coronavirus pandemic. In addition, wage growth slowed again. However, this is also increasing speculation that the Bank of England will cut interest rates in the near future.

The wage growth figures in particular are likely to support investors’ expectations, with the majority anticipating two interest rate cuts of a quarter percentage point each by the end of the year. Added to this is a surprising decline in inflation, which could pave the way for interest rate cuts. And while inflation remains above the central bank’s target, it surprisingly dropped to 3.0 per cent at the turn of the year, marking the lowest level since March 2025. Companies and financial investors are hoping for a further boost to the economy resulting from the interest rate cuts.

Experts also expect the UK economy to benefit further from its traditional ‘assets’. The country’s major strengths include its universities, research and development, and thus also ‘knowledge-based’ industries. British pharmaceutical giants AstraZeneca and GSK both work closely with research institutes at elite universities, and the country boasts a traditionally strong financial sector. Experts also consider many of the country’s small and medium-sized companies, known as ‘small caps’, to be well positioned, as they tend to be able to respond more flexibly to a rapidly changing industry environment. Note: The companies listed here have been selected as examples and do not constitute investment recommendations.

Push for re-tightening relations with the EU

The UK also hopes to support the potential upturn with new alliances. With China continuing to grow in strength and the USA no longer a reliable trading partner, the country is looking for new allies. Having already concluded a free trade agreement with India last year, the UK is now once again putting out feelers to the EU.

According to a report in the Handelsblatt newspaper, a summit meeting between the EU and the UK is scheduled to be held before the summer break with the aim of deepening relations between the two sides. The Handelsblatt cites several sources claiming that negotiating teams are to present concrete results by late June. Specifically, the agreements will cover emissions trading, the electricity market, food and agricultural standards, and defence cooperation.

One recent development saw the UK rejoin the Erasmus student exchange programme, which the country had left with Brexit. Starting in 2027, the UK will once again participate in the EU exchange programme. This will allow students to study in the UK as part of the programme and will open the way for British students to study in the EU.

British stock market off to a good start to the year

In line with the improved sentiment among British companies, the UK stock market has also been one of the winners so far this year. With an increase of over 8%, the MSCI UK, which tracks the performance of the largest listed companies in the UK, is ahead of other major indices. By comparison, the MSCI USA has made a meagre gain of half a percent so far in 2026. The MSCI Europe and MSCI Germany are also lagging behind with gains of 6.8% and 3% respectively.

Please note: Past performance is no reliable indicator of future value development. Source: LSEG Datastream, Data as of 24.2.2026, all figures are total return and calculated in USD Investments in securities entail risks as well as opportunities.

On the sector side, British oil stocks have been in demand so far this year, with Anglo American and Rio Tinto both posting gains of over 20%. The companies have probably benefited in particular from the rise in the oil price in recent weeks.

However, the aerospace and defense companies Rolls Royce and BAE Systems were also among the biggest winners on the British market in the first two months of the year. They continue to benefit from the increase in defense spending in Europe.

The index heavyweights Glaxo Smith Kline, AstraZeneca and Unilever have also risen sharply so far in 2026. Shares in the British bank HSBC – the UK’s largest listed company by market valuation – have also risen by over 14% so far. The company recently presented its figures for the past financial year and exceeded market expectations.

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