EU and US could reach trade deal this weekend - Reuters
Investing.com -- Barclays (LON:BARC) has cut its year-end target for the Stoxx Europe 600 (SXXP) index to 490, down from its previous forecast, citing rising recession risks and deepening global policy uncertainty tied to a reset in the global order under the Trump administration, in a note dated Monday.
Analysts at Barclays Research said the escalation of tariff threats and reciprocal trade measures have introduced fresh headwinds to global markets, with the fallout likely to weigh heavily on corporate earnings and investor sentiment.
While markets could stage short-lived bounces on positive trade headlines, the bank warned that the absence of capitulation in valuations and positioning suggests that more downside is possible if former President Trump does not reverse course.
"Stocks could always bounce from oversold levels, and technical indicators are flashing some contrarian buy signals," analysts said.
"But we wouldn’t recommend playing hero here—valuations, earnings expectations, and aggregate positioning are still too elevated to suggest a true bottom," they added.
Barclays’ new 490 target for the SXXP comes with the caveat that forecasting amid such geopolitical uncertainty carries limited utility.
The brokerage notes a wide range of possible outcomes: European stocks could drop to 390 in the event of a prolonged recession, or rebound toward 550 if tensions de-escalate swiftly.
Still, analysts say a return to recent market highs appears unlikely, given the scale of the damage already inflicted on global confidence and earnings potential.
The brokerage also flags Europe’s vulnerability as an open economy, exposed to both trade barriers and a potential wave of deflationary pressures from China.
However, Barclays notes that European equities may prove more resilient relative to previous downturns.
Fiscal stimulus in Germany, room for additional monetary easing by the European Central Bank (compared to the more constrained U.S. Federal Reserve), undemanding valuations, and already light strategic positioning in European stocks are cited as supportive factors.
Against this backdrop, Barclays has upgraded its stance on UK equities, moving to overweight on the FTSE 100. The index is viewed as a “cheap stagflation hedge,” offering defensive qualities amid policy uncertainty and persistent inflation concerns.
The brokerage’s sector allocation reflects a broader shift towards defensiveness, with an upgrade to Healthcare from underweight to neutral, and downgrades to Diversified Financials and Leisure.
It maintains overweight positions in Telecoms and Real Estate, and continues to back Technology and Aerospace & Defence as quality cyclical hedges. Within financials, Insurance is overweight while Banks are neutral. Energy and Consumer Discretionary remain underweight.
Barclays’ base case now assumes a mild U.S. recession and a parallel contraction in the euro area in 2025. The inflationary effect of tariffs could prevent the Fed from delivering rate cuts, even as growth stalls.
Meanwhile, the European policy mix is seen as relatively more supportive, with monetary easing still on the table and fiscal policy turning expansionary in key economies like Germany.
Earnings forecasts have been revised lower. Barclays now expects zero EPS growth for European companies this year, with risks skewed to the downside, especially in cyclical sectors.
While first-quarter earnings estimates have already been marked down sharply, Barclays sees little scope for optimistic corporate guidance and anticipates further full-year downgrades.
With equity risk premia still below historical averages and valuations not yet at recessionary levels, Barclays says the case for cash and bonds over equities remains compelling in the near term.