The FTSE 100 is being valued at a 20% discount to its long-run average, UBS noted after examining dozens of results for the second quarter, with earnings generally meeting lowered market forecasts but analysts forecasting earnings will fall in the second half.
London's blue chips met estimates that had been lowered by around 2-3% in the past month, UBS noted, which was on the back of the US dollar weakness and sterling strength, as the Footsie generates around 45% of earnings in dollar-linked currencies.
A 9% decline in earnings is forecast for the rest of 2023, UBS noted, followed by a rise of 4% after.
"This is broadly in line with our expectations," said UBS strategist Caroline Simmons.
Pointing out that the bank and others "agonize" over earnings reports and revisions as they are "some of the greatest drivers of equity markets over time", Simmons said the overall picture, however, is that nominal GDP is set to decline this year, so earnings should also fall.
"But the FTSE 100 is already priced for this, and we expect to see the index nudging higher toward our target of 8000 by year-end."
The FTSE 100’s 12-month forward P/E valuation is 10.7x, a 20% discount to its long-run average.
Drilling down into sector and company results, earnings beats have generally been seen in consumer discretionary sectors, with airlines in the industrial space and consumer staples too.
"The interplay of some excess savings, strong employment, above-average wage growth, high but improving household energy and food costs, and rising credit costs still makes for a confusing landscape for the consumer," said Simmons.
Bank results have been "mixed", she said, and have seen share prices most sensitive to net interest margins and NIM guidance.
"One bank has guided slightly lower on its margins, suggesting they have peaked, and another signaled some further upside to come, reflecting slight operational differences."
Most banks have seen resilient credit quality and are provisioning for bad loans that are yet to materialise, she noted.
"The institutions most exposed to investment banking have had the most disappointing results, owing to lower trading revenues. But all the UK banks are offering large share buyback programs in excess of 10% of their share capital, in addition to their normal dividends."
UBS strategists feel the Bank of England is likely to continue raising rates to 5.75%, despite the better-than-expected recent inflation print, due to lingering concerns over core inflation.