Barclays strategists argue that equity markets are entering a phase where corporate profits must shoulder a greater share of support for stock prices as bond market turbulence intensifies and the path for equities looks rougher.
Trading was marked by another round of volatility this past week, driven by a combination of higher oil prices, worries about the Federal Reserve’s credibility on inflation-fighting, and concerns about whether hyperscaler capital expenditure plans are sustainable. The Federal Open Market Committee meeting was the focal point for investors, with markets assigning roughly a 40% probability to a rate hike ahead of the decision.
Commenting on recent policy signals, Barclays strategists noted that Fed Chair Warsh has "signalled a greater willingness to allow long-end Treasury yields to deliver the desired financial tightening, effectively raising the hurdle for further policy hikes in the near term." That signal, they say, has been a factor in the move higher in long-term yields.
Even as oil climbed back above $90 a barrel amid renewed U.S.-Iran tensions, Barclays pointed out that "breakeven inflation rates have barely moved." Instead, the firm highlights that uncertainty about how the Fed will react has lifted real yields and increased volatility in the bond market, particularly at the long end.
The strategists also flagged a rise in long-duration debt issuance as a compounding influence. Corporates and hyperscalers account for much of the increase in supply, which Barclays says is "potentially crowding out demand." That growing supply, combined with higher real yields and elevated term premia, is beginning to weigh on equities, they wrote.
Positioning in markets remains elevated, and Barclays contends that this combination of factors "is beginning to weigh on equities, implying that earnings will need to do more of the heavy lifting going forward." So far, earnings have helped. Second-quarter earnings per share growth is running at its strongest pace in four years across both the U.S. and Europe, a dynamic that has kept headline indices close to recent highs.
However, Barclays cautions that market internals tell a more nuanced story. Leadership has been rotating away from duration-sensitive growth stocks, a shift the firm says supports a preference for a Value tilt and underpins its long-standing Overweight stance on Banks.
Technology stocks have felt the stress more acutely. The strategists described a "brutal momentum unwind since early June" that has hit the AI and hyperscaler complex hard. The Nasdaq briefly moved into correction territory, and aggregate hyperscaler performance has been approaching bear-market levels.
Barclays characterized the drawdown as "largely positioning driven," noting that most AI, semiconductor and hyperscaler companies that have reported earnings so far "have delivered robust earnings and raised capex forecasts ahead of consensus expectations."
Despite the resilience in Tech earnings, Barclays warned that "unwind risk may not yet be over for the AI/momo winners," while also acknowledging that Tech’s earnings strength "may help put a floor under the Tech complex post-indiscriminate selling."
What this means for markets
- Rising long-term real yields and increased term premia are exerting downward pressure on equities.
- Expanded long-duration debt issuance by corporates and hyperscalers may be crowding out investor demand for other risk assets.
- Strong second-quarter EPS growth has so far kept headline indices near highs, but leadership shifts suggest a more selective market.
Barclays’ outlook implies investors should watch earnings delivery closely as a primary determinant of stock price stability in the near term, while also tracking bond market dynamics and long-end supply trends.