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Investing.com -- Barclays is sounding a note of caution on U.S. equities, warning that investors may be underestimating mounting macroeconomic risks even as valuations remain elevated.
“Equities could be getting complacent at these valuations considering EPS estimate cuts, high rates, rising jobless claims, and ongoing tariff uncertainties,” Barclays (LON:BARC) analysts wrote in a recent note.
The firm stated that the rebound in equity markets over the past month has sharply lowered the market-implied probability of a recession, even though Bloomberg survey forecasts for a downturn have continued to rise.
“Equities appear to be looking through macro risks despite survey metrics that still imply elevated probability of a recession,” Barclays noted.
While the bank acknowledged that “recession risks have moderated since April,” it pointed to a series of factors that suggest the market’s optimism may be premature.
Among them: continued downward revisions to earnings estimates, stubbornly high interest rates, and a labor market showing signs of strain. The May rally, they added, “likely got an assist from systematic/technical tailwinds.”
The analysts also noted a historical parallel: “The last time the Bloomberg survey recession forecasts saw this kind of upward climb was in 2022,” when forecasts remained high even as equities surged in 2023.
This, they said, “demonstrates equity markets’ willingness to continue looking through macro distortions in the post-COVID era.”
Still, Barclays urged caution, citing the disconnect between sentiment and fundamentals.
“Equity market pricing of a recession has diminished greatly even as survey forecasts continue to rise,” they wrote, underscoring the potential for a correction if macro risks reassert themselves.