Barclay’s Cau: EU capped, but new highs for U.K.

Investing.com -- European equities have lost ground against U.S. counterparts in the second quarter, with the region’s earlier outperformance fading.

Barclays (LON:BARC) analysts said in a note dated Friday that while EU stocks remain up year-to-date, gains are being held back by currency strength, trade concerns and weak earnings revisions.

The euro’s appreciation has weighed on exporters, whose earnings per share forecasts have been revised down relative to U.S. peers. 

Barclays pointed to tariff uncertainty and Section 899 of the U.S. tax code as further risks heading into a key July 9 deadline. 

Without a shift in trade conditions or exporter participation, the broader EU index is unlikely to break out of its current range.

Gains in European equities have so far been led by domestic sectors such as financials, utilities, construction and telecoms. 

These industries have benefited from Germany’s fiscal stimulus, falling ECB rates and rising defense budgets. Domestic small caps are also gaining ground. 

However, Barclays analysts noted that valuations are already slightly above historical averages, limiting room for near-term upside.

Meanwhile, U.S. markets continue to rise, driven by resilient Big Tech earnings and strong AI momentum. 

The brokerage’s U.S. equity strategists now tactically prefer American stocks over international markets. 

Systematic investor flows are also more supportive of the U.S., given lower positioning among risk-control and trend-following funds.

In contrast to the flat performance in Europe, U.K. equities have reached record highs. The FTSE 100 climbed this week, extending gains since Barclays upgraded its outlook on the region in April. The brokerage said the U.K. remains a viable stagflation hedge and is facing less trade risk, thanks to quicker agreements with the U.S.

Barclays also noted that economic data in the U.K., including GDP and labor market indicators, show signs of softness. That has raised expectations for continued Bank of England rate cuts, which could support consumer-facing and rate-sensitive sectors such as homebuilders.

Valuations for U.K. domestic stocks remain depressed. Foreign buyers are showing renewed interest, with a rise in inbound deal activity. 

Barclays said overseas acquirers are taking advantage of low valuations, offering high premiums in recent bids.

The U.K. government’s latest spending review increased capital investment in health, defense and R&D. Markets responded positively, though Barclays cautioned that fiscal headroom remains limited. 

The brokerage’s economists expect tax hikes may be required in the autumn to meet fiscal targets.