Barclays analysts said that unusually strong corporate earnings in the first quarter have enabled equities in Europe to better withstand the headwinds from rising bond yields. The bank pointed to Q1 results as the principal driver pushing earnings-per-share growth to levels not seen in several years across both US and European markets.
According to Barclays, the equity gains delivered so far this year have been supported mainly by the strength of earnings. The Q1 reporting season triggered upgrades for fiscal year 2026 that exceeded what the bank would normally expect on an annual basis, although those upgrades were not evenly spread across the market. Instead, outperformance was concentrated in specific sectors, notably Energy and Semiconductors.
Barclays argued that this earnings cushion has allowed equity markets to absorb higher government bond yields that followed resilient US economic data. The bank characterized the move in yields as reflecting a reflationary backdrop rather than being driven solely by inflation pressures.
With the US 10-year Treasury yield having moved above 4.5%, Barclays warned that rates are approaching levels that could begin to exert pressure on equities. Market pricing has shifted to reflect a more hawkish Federal Reserve and European Central Bank as inflation risk rises, and the bank noted that concerns over fiscal loosening in developed markets are contributing to upward pressure on term premia.
Still, Barclays emphasized that real interest rates remain broadly stable. While nominal bond yields may appear elevated when viewed through the post-financial crisis lens, the bank observed that markets have reached similar levels in the past and that low risk premia during much of the 1990s did not prevent satisfactory stock returns.
On commodities, Barclays highlighted that commodity trading advisors' duration short positions look extended. The bank suggested that if oil prices fall - for example, on any easing of tensions in Iran - yields could move lower and support a broader recovery in equity performance.
Finally, Barclays expects Value stocks to remain well placed as long as growth holds and the reflationary setup continues. The bank identified sectors such as Energy, Financials and Materials as likely leaders within that Value-oriented market environment.