MW If stocks are to continue rising, energy prices need to start falling, Barclays says
By Jules Rimmer
Equity markets disagree with oil and bond markets. Something has to give.
If the Axios reporting is accurate and the U.S. and Iran are nearing completion of an agreement to end the war, then this might alleviate the pressure on markets imposed by sky-high energy prices.
European stocks XX:SXXP have rallied 10% from their March trough. The easy ground has been recovered, though, and "a further melt-up is hard to justify without energy risks easing meaningfully." The global economy is approaching crunch time, and so are markets. If stocks are to rally further, a sharp reversal in oil is a must.
This call comes from Barclays European equity strategy team, led by Emmanuel Cau, and outlined in a note published Wednesday.
The alleviation Barclays sought in the pressure imposed by the oil-price (BRN00) spike and various other supply constraints might just have been delivered if the reporting from Axios is accurate that the U.S. and Iran are nearing an agreement to end Gulf region hostilities.
The inflection point in markets since the first few weeks of the war in the Middle East was catalyzed by what Barclays strategists call the "AI frenzy." Cau cites twin drivers of the rally: a perception that a "Trump put" - whereby investors believe the U.S. president will ultimately do whatever is necessary to keep stock markets buoyant - exists and a "powerful FOMO" with investors seeing the market trend higher and then climbing aboard the bandwagon so as not to miss out.
Equities have rebounded more than oil and yields have retraced - something has to give.
But for the Barclays team equities are looking increasingly disconnected from fundamentals, oblivious to the signals that the oil and bond markets are sending. Thus far, two months into the Iran crisis, running down energy inventories has insulated economies from the worst impacts of $100-plus oil, but, Cau warns, "the buffer is shrinking and the risk of demand destruction is edging closer."
Relatively high valuations also limit the margin for error if macroeconomic conditions become more hostile.
Moreover, market leadership is reliant on a narrow cadre of tech stocks MAGS and some activity data have begun to signal weakening trends. Barclays thinks earnings downgrades in Europe are increasingly likely, especially visible in consumer-facing sectors. This contrasts with the earnings momentum being maintained in the U.S. and partly explains why Barclays expresses a preference for overweighting American equities SPX relative to their European peers.
Europe vs. U.S.: Relative performance follows activity momentum.
The U.S. earnings growth is buttressed by "the AI-led tech investment supercycle" and, as has been widely lauded in recent months, its energy independence. Barclays does acknowledge that relatively loose fiscal policy in the U.S., Germany and Japan remains supportive, and so, while U.S. equities are the preference, there are pockets of Europe and Japan where it feels comfortable, notably in industrials, materials, tech and utilities.
-Jules Rimmer
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May 06, 2026 10:57 ET (14:57 GMT)
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