Barclays strategists anticipate that the global equity market will experience stricter financial conditions as the end of the monetary easing cycle approaches. In a research note led by Emmanuel Cau, they indicated that the current equity bull market is facing increased pressure, as the possibility of renewed monetary tightening diminishes the support from lower interest rates. While economic growth is bolstered by nominal growth outpacing nominal bond yields, accommodating fiscal policies, and investment in areas like artificial intelligence, infrastructure, and strategic autonomy, the strategists caution that higher capital costs could suppress future equity returns and slow economic expansion.
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The rising bond yields are reshaping the comparative appeal of equities relative to other asset classes. Barclays noted that elevated interest rates have made cash holdings more attractive while decreasing equity risk premiums, which diminishes the extra returns for investors willing to take equity market risks. Investing in equities is described by the bank as "no longer a no-brainer" at the current interest rate levels, emphasizing the growing significance of corporate earnings growth in maintaining share prices.
Barclays projects a 16% increase in European corporate earnings by 2026, followed by an additional 10% uptick in 2027. They attribute ongoing earnings momentum to a continuous capital expenditure cycle, especially in sectors tied to AI and infrastructure. Despite caution leading up to September due to anticipated market volatility from rising bond yields and oil prices impacting the summer equity rally, Barclays maintains a limited outlook for European equities in the last quarter of 2026. Factors such as reduced investor positioning, coupled with historically favorable seasonal trends, may bolster market performance. The strategists also recognize that equity valuations and market breadth have adjusted to account for higher interest rates and increased energy prices.