Earnings season outlook: banks, retail, inflation, and the FTSE 100

• The UK market remains reasonably valued with a forward price-to-earnings (P/E) ratio of approximately 13.5x as the earnings season kicks off.
• Key sectors in focus are banks (watching net interest margins as rates peak), resources (vulnerable to global demand, especially due to uneven China recovery and US slowdown fears), and retail, which faces significant risk from anaemic UK GDP growth.
• The main risks to monitor include core inflation, global geopolitical instability & currency fluctuations.

The convergence of historical technical milestones and shifting macroeconomic fundamentals has positioned the January 2026 earnings season as one of the most significant periods for the London equity market in the post-financial crisis era.

As the FTSE 100 index breached the psychologically and technically significant 10,000-point threshold in the opening days of the year, market participants transitioned from a state of celebratory sentiment to rigorous fundamental scrutiny.

Let us take a look at how the dynamics of the upcoming corporate earnings season cycle could impact the United Kingdom’s blue-chip benchmark.

The January 2026 earnings season is starting off in a "mild Goldilocks" environment. Inflation is finally cooling down enough that the Bank of England can lower interest rates to support the economy without worrying that prices will spike again.

This follows a very strong 2025, where the UK stock market (FTSE 100) actually performed better than the US market (S&P 500), returning nearly 23% (in local currency).

Now, market participants are no longer looking for "crisis management", they are looking for things to get back to a normal: steady pace for both company profits and interest rate levels.

In 2025, the UK struggled with high interest rates and expensive loans. While inflation hit a brief bump (rising to 3.8%), it is now starting to fall again. However, food prices are still up about 3.3%, which makes things tricky for businesses.

The big question for the upcoming company reports is: How are shops handling higher costs? They are also preparing for the minimum wage increase coming in April 2026.

When it comes to consumers, the Office for Budget Responsibility’s (OBR) recent forecasts suggest the household savings ratio (which peaked during the pandemic and remained high due to high interest rates) will begin to normalize.

As the Bank of England base rate moves toward a "neutral" level (around 3.0%–3.5%), the incentive to keep cash in the bank decreases, encouraging spending.

The Monetary Policy Committee (MPC) entered 2026 with a split consensus, reflecting the ongoing debate over the pace of easing. While the Bank of England signalled a dovish turn for the first quarter of 2026, the persistence of services inflation and the potential for a "loosening" labour market suggest that rate cuts will be measured.

Analysts expect around 44-basis-points of cuts throughout 2026 (per LSEG data), which would support equity valuations by reducing the discount rate applied to future cash flows and improving the relative appeal of stocks versus bonds.

Despite recent gains, the UK market remains trading at a discount compared to historic averages and international peers like the S&P 500. A forward price-to-earnings (P/E) ratio of roughly 13.5x suggests that UK equities are not flashing "expensive" warning signs yet.

This bodes well for the FTSE 100 index heading into earnings season.

The FTSE 100 is heavily weighted toward traditional sectors, and their performance will dictate the index's direction this quarter:

• Banks and financials: The banking sector has been a primary engine of profit growth, buoyed by the higher interest rate environment of the last two years. The key metric to watch this January will be Net Interest Margins (NIM).

As the Bank of England moves to cut rates, margins may peak. Market participants may scrutinise guidance on loan loss provisions with any uptick signalling that high borrowing costs are starting to distress borrowers more than anticipated.

• Resources: Miners and energy commodity giants make up a significant portion of the index’s earnings. While oil and metal prices have found support from supply constraints, they remain highly sensitive to global demand. With China’s economic recovery still uneven and fears of a US slowdown lingering (some analysts peg the recession risk at 35%), forward guidance from miners will be critical.
• Retail and consumer discretionary: This is perhaps the area of greatest risk. UK GDP growth is forecast to be anaemic in 2026, potentially hovering around 1.2%. Highlighting this fragility, some major retailers such as Next PLC have already warned of "tougher year-on-year comparatives."¹ If wage growth slows and inflation in essentials like food remains "sticky," consumer-facing stocks could face volatility.

As is the case with markets overall, significant risks remain in 2026 that could trigger volatility during this earnings season:

“Sticky” inflation: While headline inflation has cooled, core components, particularly services and food prices, remain stubborn. If inflation data surprises to the upside in Q1 2026, the Bank of England may need to hold rates higher for longer, dampening equity valuations.

Global geopolitics: The FTSE 100 is an international index, with roughly 75% of its revenues derived from overseas. Trade tensions or geopolitical instability can rapidly impact the index’s heavyweights, regardless of the domestic UK economy.

Currency fluctuations: Sterling has held up well, but any sharp strengthening of the pound against the dollar acts as a headwind for the FTSE 100’s foreign earners. Conversely, a weaker pound boosts reported earnings but often signals declining confidence in UK assets.

Scenario A: Earnings beat expectations, and forward guidance remains robust, particularly from the banking and energy sectors. Theoretically, this should be a positive for the FTSE 100.

Scenario B: Companies beat earnings but issue cautious guidance due to macro uncertainty, the index may find itself range-bound. This has been a common theme in recent years, where good results are met with muted share price reactions due to fears over the next quarter.

Scenario C: Should we see a "hard landing" signal from the US or a resurgence in UK inflation, risk appetite could evaporate quickly. In this scenario, defensive sectors (utilities, healthcare) may outperform, while cyclicals could prove to be a drag on the index.

The January 2026 earnings season is set to be a defining period for the markets. While the fundamentals of the FTSE 100 appear strong, underpinned by solid yields and reasonable valuations, the macroeconomic risks cannot be ignored.

Market participants should look past the headline profit numbers and focus intently on forward guidance. In a year expected to be defined by anaemic growth and falling rates, corporate commentary on margins and demand may prove to be far more valuable than historical performance.