European equities' outperformance over the U.S. has stalled as oil prices and interest rates climb, Barclays strategists say, though they argue the region's underlying growth still looks solid. The bank stays neutral between Europe and the U.S. and expects the ECB to raise rates again on Thursday, while flagging renewed stagflation concerns tied to the U.S.-Iran conflict.
Rally stalls after a strong year-to-date run
European stocks are up roughly 10% year-to-date, not far behind the U.S. But strategists led by Emmanuel Cau say the early-summer outperformance has stalled amid rising energy prices, higher rates and political noise in France and Germany. Barclays holds a neutral stance between the two regions, noting that a momentum unwind has largely already played out. A recent bottoming-out in Big Tech has renewed support for American markets, the strategists said.
ECB set to hike again on Thursday
Barclays economists expect the European Central Bank to raise its policy rate to 2.5% at Thursday's meeting, the second hike this year. Unlike in June, the growth backdrop looks more resilient, with nominal GDP growth expected to stay above trend into 2027, led by Germany. High-frequency data continues to strengthen, supported mainly by defense, infrastructure and construction activity, while loan demand for investments is picking up as strategic autonomy initiatives underpin a broader capex cycle. German earnings-per-share revisions are turning higher from depressed levels, the strategists noted.
Energy shock revives stagflation talk
The bank also flagged that the recent jump in oil prices, tied to the persisting U.S.-Iran conflict and depressed gas storage levels, has revived stagflation concerns. According to the strategists, the shock is "of much lower magnitude than in 2022" and isn't specific to Europe, but consumers still face pressure from lower disposable income, and real wages have turned negative in the euro area. Strong growth is the primary reason for the ECB to reverse its previous rate cuts, Cau and his team said, though they cautioned that further energy price increases could raise concerns about a policy mistake at the central bank.
Barclays tilts toward capex plays and Germany
Positioning-wise, Barclays continues to prefer capex exposure and banks over consumer-facing sectors, and it has closed its underweight on communication services. The bank cited strategic autonomy and AI-driven capex, along with German stimulus, as continuing to support earnings growth for investment beneficiaries. It trimmed its luxury sector view to market-weight given higher oil prices and incrementally weaker demand signals from China. Barclays also continues to prefer Germany over France, pointing to a stronger fiscal position, improving growth momentum and undemanding valuations.
Source: Investing.com
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