UK equities have adjusted sharply enough to reflect near-recession conditions in the wake of the US-Iran conflict, with mid-cap valuations suggesting flat or even slightly negative economic activity, according to a recent note from Goldman Sachs.
The FTSE 250 is currently trading around the 15th percentile of its historical price-to-earnings range, while most global equity markets are positioned much higher, between the 80th and 95th percentiles, the bank said. Its economists have also revised down their UK growth outlook, cutting their Q4/Q4 GDP forecast to 0.6% from 1.5% prior to the conflict.
“UK stocks have been quick to discount and are arguably overly discounted in some cases,” Goldman Sachs noted, adding that FTSE 250 valuations are “likely consistent with activity running at zero or slightly negative.”
The announcement of a two-week ceasefire between the U.S. and Iran helped trigger a global rebound in equities, as energy prices eased from recent highs. Goldman Sachs’ commodities team expects flows through the Strait of Hormuz to begin normalising over the weekend, followed by a gradual recovery in Persian Gulf exports over the course of a month.
The bank has slightly lowered its second-quarter Brent crude forecast to $90 per barrel, while leaving its outlook for the third and fourth quarters of 2026 unchanged at $82 and $80 respectively.
Energy’s contribution to UK headline inflation is expected to shift from a negative 0.1 percentage point in February to a positive 0.3 percentage point in March, with further increases anticipated in April, Goldman Sachs said.
The UK PMI output prices index also rose in March, exceeding levels that would typically be implied by movements in oil and gas prices, with price pass-through in the services sector proving stronger than in the euro area.
Goldman Sachs highlighted that UK cyclical stocks have underperformed defensive names more significantly than in the U.S. or eurozone. Retail stocks within the FTSE 350 have declined more than would be suggested by GfK UK Consumer Confidence data alone.
Domestic-focused UK equities, tracked through the GSSTUKDE basket, have diverged from their usual relationship with GBP/USD over the past year. Despite a stronger pound, these stocks have lagged, with their relative performance against the FTSE 100 nearing lows last seen in 2022.
The FTSE 100 closed at 10,603 on April 9, trading on a 12-month forward price-to-earnings ratio of 13.0 and offering a dividend yield of 3.3%, compared with a forward P/E of 20.4 for the S&P 500, Goldman Sachs said. The bank maintains a 12-month target of 10,800 for the index.
On the rates side, Goldman Sachs noted that current pricing in real estate and housebuilder stocks suggests higher yields are already reflected in valuations. “With weak economic growth, we expect gilt yields to moderate,” the bank said. The UK 10-year gilt yield currently stands at 4.8%, with Goldman Sachs projecting a decline to 4.4% over the next 12 months.
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