Barclays: Favor EU/UK vs. US equities on 'better policy, growth trade-off'

Recent stagflationary data in the US has dampened the reflation trade, prompting stock markets to recognize the “higher-for-longer” interest rate environment, Barclays strategists said Wednesday.

Positioning is clearer after the pullback, yet not overly depressed, as risk reduction has been moderate. The combination of challenging seasonality, overextended cyclicals, geopolitical uncertainty, and the Federal Reserve's data-driven approach could “keep markets on edge into summer,” Barclays cautioned.

However, balanced economic data and the Fed's reluctance to raise rates create a “goldilocks-ish” scenario that's favorable for equities, at least for now.

Still, a hot, yet softening US economy points to fewer and later rate cuts, but no hikes either.

In Europe, meanwhile, Barclays strategists see “a better policy/growth trade-off as activity is rebounding and disinflation leaves the door open for ECB/BOE cuts in June.”

“We keep a tactical OW on EU/UK vs. US, and expect small caps to benefit from broadening out,” they added.

Overall, growth and policy cycles differ across regions. Nonetheless, Barclays anticipates steady economic growth, driven by solid private sector fundamentals and robust fiscal support. Meanwhile, central banks are expected to lower rates as the year unfolds, the investment bank added.

Commenting on the ongoing earnings season so far, strategists said first-quarter results exceeded lowered expectations, bolstered by resilient profit margins and positive guidance outlooks. Year-to-date earnings per share (EPS) revisions have been slightly negative but have recently stabilized.

“We believe mid-single-digit growth in ‘24 is achievable given easy base effects, while near-trend GDP growth should preserve margins and top line,” they commented.

In Europe, valuations have improved following the recent pullback “and don’t look demanding,” Barclays noted, with the price-to-earnings ratio around 13.5x, below the long-term average of 13.8x. Strategists see the potential for a modest re-rating, given the anticipated central bank rate-cutting cycle and steady earnings, “driving upside for SXXP (540 target).”