Rally in European stocks "looks tired" - Barclays

Investing.com -- A recent rally in the pan-European STOXX 600 index may be running out of steam, according to analysts at Barclays, citing in part a decline in voltility in both equity and bond prices in the region.

Enthusiasm over developments in artificial intelligence and a potential ratcheting down in interest rates by the European Central Bank have lifted the STOXX 600 since late 2023. Despite retreating in April, the index is now hovering just below record high levels.

However, in a note to clients on Friday, the Barclays analysts argued that the run-up in stocks in Europe is "starting to look tired again."

"Positioning and sentiment have rebounded, earnings season is over, seasonality is getting trickier and we've had some mixed data on both the growth and inflation fronts," the analysts wrote. "Amid all this, both equity and bond volatility have continued to fall, to depressed levels, which may reflect some degree of complacency."

They added that some consolidation in shares in Europe is both "logical and healthy." On Friday, European equities were trading lower, tracking weakness in Asia and also Wall Street as increasing anxiety over sticky U.S. inflation and high interest rates battered sentiment towards risk-driven assets.

But the Barclays analysts noted that the depth of the pull-back in Europe may be limited by yet another quarter of blockbuster earnings from AI darling Nvidia (NASDAQ:NVDA).

"[E]quity markets are still in thrall to AI. Nvidia's numbers this week should at least help to reassure that the hype is justified," the analysts said.

Further support may come better-than-anticipated European manufacturing activity data in recent days, they added, saying that the figures could boost corporate results in the second half of 2024 and "provide a backstop" for more cyclical stocks like miners and automakers.