After two years of contraction, UK corporate profits are finally turning the corner. Deutsche Bank expects the second half of 2025 to mark the first sustained return to earnings growth since early 2023, with rate cuts, fading trade shocks and improving sentiment setting up a stronger 2026.
UK equities have spent much of the past two years trapped in a grind of downgrades, margin pressure and policy uncertainty. That phase now looks close to its end.
According to Deutsche Bank Research, earnings across the FTSE 100 are set to rise by 1% year on year in the second half of 2025, the first positive reading since the first half of 2023. While that rebound is modest, Deutsche argues consensus is still too cautious and leaves room for upside surprises this earnings season.
The implication is simple. Britain is moving back into a growth phase, just as valuations remain compressed relative to global peers.
Earnings growth turns positive at last
Deutsche expects the second half to mark an inflection point rather than a one-off. Health care and consumer discretionary companies are forecast to provide the biggest support to year-on-year earnings growth, offsetting continued weakness in energy and consumer staples.
Consensus currently assumes a 4% sequential decline in earnings versus the first half. Deutsche is less pessimistic, arguing that fading trade uncertainty, additional Bank of England rate cuts and better-than-expected UK data point to scope for earnings to beat expectations by around 4%.
That matters because the downgrade cycle has already been brutal. Earnings estimates were cut by roughly 9% through the first three quarters of 2025, and while revisions stabilised late in the year, forecasts still sit well below pre-shock levels.
2026 is where the momentum builds
If the second half of 2025 is about stabilisation, 2026 is where Deutsche sees momentum building.
The bank forecasts FTSE 100 earnings growth of around 8% next year, accelerating from a 1% decline in 2025. UK small and mid-caps are expected to grow even faster, with earnings up about 10%, despite having lagged large caps badly over the past year.
Basic materials and utilities are highlighted as key swing factors. After acting as a drag on profits, basic materials are expected to turn into a meaningful tailwind in 2026, while energy’s negative contribution to earnings growth should shrink sharply.
The risk, Deutsche notes, is political noise. Local elections and renewed fiscal debates could inject volatility into UK assets. But the bank sees limited downside risk to large-cap earnings forecasts, with slightly higher sensitivity among FTSE 250 names.
Sales flat, margins under pressure, but manageable
Revenue growth remains the weak link. Deutsche expects sales to be broadly flat in the second half, with energy again acting as the biggest drag on year-on-year comparisons.
That combination, flat sales and modest earnings declines sequentially, implies some margin compression versus the first half. Aggregate FTSE 100 margins are forecast to ease slightly to around 11%.
Even so, the broader picture is one of stabilisation rather than deterioration. Telcos and real estate are expected to see the strongest sales growth, while financials and industrials should contribute positively overall.
Valuations still price in scepticism
Despite the improving outlook, UK equities remain cheap.
Deutsche points out that forward price-to-earnings multiples for both the FTSE 100 and FTSE 250 sit well below long-term averages and at a steep discount to US indices. Small and mid-caps look particularly undervalued, reflecting prolonged earnings downgrades and weak relative performance.
That disconnect, improving earnings on one hand and depressed valuations on the other, is the crux of the investment case.
After two years of disappointment, Britain does not need perfection. It simply needs growth to come back. Deutsche’s message is that it finally is.