UK Equities: Finding Value in a Slowing Economy – Q2 Earnings Signal Resilience

The UK economy faces headwinds from global trade tensions, inflation, and slowing growth, yet select sectors are proving remarkably resilient. Q2 2025 corporate earnings have revealed pockets of strength, particularly in consumer discretionary and tech stocks, offering investors a compelling entry point for tactical overweights. Companies with robust balance sheets, defensive business models, and positive guidance are positioned to outperform as macro risks crystallize. Here's why UK equities deserve a closer look—and where to find the best opportunities.

Consumer Discretionary: Thriving Amid Frugality

The UK consumer discretionary sector is defying expectations, driven by a shift toward “frugal luxury” and value-driven spending. Discount retailers and affordable fashion brands are leading the charge, while traditional durables face stagnation.

Case Study: Primark (LSE:PRMR)
Primark's Q2 results exemplify this trend. The fast-fashion giant reported an EPS beat of 4.5% versus estimates, driven by strong volume growth in its UK/Europe core. Its focus on low-cost, high-turnover products aligns perfectly with a cost-conscious consumer base. shows a consistent expansion, even as broader retail footfall lags. With a net cash position of £3.2bn and a dividend yield of 3.8%, Primark offers both growth and income appeal.

McCormick & Co. (LSE:MKC): Flavoring Resilience
The US-based spice giant's UK operations underpinned a 4.5% EPS beat in Q2. Its EMEA segment, which includes the UK, saw organic sales rise 3% as consumers prioritized home cooking. McCormick's recurring revenue model (seasonings, sauces) and disciplined cost management——have kept margins stable. With a dividend yield of 2.1% and a balance sheet capable of weathering commodity cost pressures, this is a defensive gem in a volatile sector.

Tech: Navigating Headwinds with AI and Cybersecurity

The UK tech sector faces near-term challenges, including US tariff risks and geopolitical uncertainty. However, long-term catalysts—such as AI adoption and cybersecurity demand—are creating undervalued opportunities.

Progress Software (LSE:PRGS): AI-Driven Growth
Progress Software's Q2 results highlighted the power of AI integration. Revenue rose 36% year-on-year, with AI-driven products like Nuclea's document processing tools boosting its Annual Recurring Revenue (ARR) by 46%. reveals a compounding revenue stream, a rarity in a sector prone to volatility. Its net retention rate of 100% and 40% operating margins suggest robust scalability.

Cybersecurity and Software: The Undervalued Bargains
Firms like Re-flow Field Management (backed by Kester Capital) and Litera (post-Peppermint Tech acquisition) are addressing critical infrastructure and legal tech needs. Software valuations in the UK remain depressed compared to US peers, offering a margin of safety. For example, UK software firms trade at an average EV/Revenue multiple of 4.2x versus 6.5x in the US—a gap that could narrow as global investors reassess regional risks.

Balance Sheets and Dividends: The Foundation of Resilience

The strongest UK equities are those with fortress balance sheets and sustainable dividends.

Discount Retailers: Cash Machines
Aldi and Lidl's UK operations, while unlisted, mirror the success of their listed peers. Their razor-thin margins are offset by high turnover and minimal debt, creating cash engines. Investors can access this through proxies like Tesco (LSE:TSCO), which is pivoting its discount arm aggressively.

Utilities and Healthcare: Defensive Anchors
While not the focus of this article, sectors like National Grid (LSE:NG) and Boots UK (WBA) provide ballast. Their stable cash flows and dividend yields (National Grid: 5.8%, Boots: 2.3%) offer downside protection, allowing investors to overweight riskier growth areas like tech or consumer discretionary.

Risks and Mitigation Strategies

• Tariffs and Trade Uncertainty: US tariffs on automotive and luxury goods remain a risk, but companies like Progress Software are mitigating this via diversification into AI software (less tariff-sensitive).
• Earnings Downgrades: The broader tech sector faces near-term headwinds, but UK firms with recurring revenue (e.g., SaaS models) are insulated.
• Interest Rate Risks: The Bank of England's expected rate cuts in 2025 should ease borrowing costs for firms with manageable debt.

Conclusion: Overweight UK Equities with Precision

The UK market is not a monolith. Investors should focus on sectors and companies that combine earnings resilience, defensive traits, and undervalued metrics. Primark, McCormick, and Progress Software exemplify this thesis, offering a mix of growth, dividends, and balance sheet strength.

Currently, the FTSE 100 trades at a P/E of 13.2x, below its five-year average of 15.5x. With select sectors showing earnings beats and the Bank of England poised to cut rates, now is the time to overweight UK equities—but with a focus on these sector-specific catalysts. The upside potential, particularly in consumer discretionary and tech, outweighs near-term macro risks.

Action Items:
1. Buy Primark (LSE:PRMR) for its defensive model and dividend yield.
2. Accumulate Progress Software (LSE:PRGS) ahead of AI adoption waves.
3. Use McCormick (LSE:MKC) as a stable core holding.
4. Hedge with UK utilities (e.g., National Grid) to manage volatility.

The UK's Q2 earnings season has revealed hidden gems in a slowing economy. Investors who target these opportunities now may reap rewards as the market recalibrates.

Disclosure: The author holds no positions in the stocks mentioned.