European equities have delivered notable gains so far this year, rising by about 10% year-to-date, but that advance has paused as several headwinds re-emerge. Rising oil prices, a move toward higher interest rates and heightened political noise in France and Germany have combined to sap the region’s early summer outperformance, according to strategists at Barclays.
In a note led by Emmanuel Cau, Barclays pointed out that the factors pressuring markets have interrupted the earlier stretch of European strength. The bank retains a neutral view versus the U.S., observing that the unwind of momentum across markets has largely taken place already. At the same time, a recent trough in Big Tech has helped American equities regain some support, narrowing the gap between the regions.
Barclays’ economics team expects the European Central Bank to raise rates for a second time this year at its upcoming Thursday meeting, lifting the policy rate to 2.5%. The strategists said the growth backdrop looks more resilient than at previous meetings, with nominal GDP projected to remain above trend into 2027, led by Germany.
High-frequency indicators show strengthening activity, driven in large part by defense-related spending, infrastructure projects and construction. The bank highlighted rising loan demand tied to investment and said strategic autonomy measures are supporting a broader capex cycle. In that context, German earnings-per-share revisions have moved up from their depressed levels.
Despite these positives, Barclays warned that the recent jump in energy prices has revived stagflation concerns. The bank attributes the energy shock to the ongoing U.S.-Iran conflict and low gas storage levels. While the strategists stressed that the shock is of much lower magnitude than the episode in 2022 and is not unique to Europe, they noted households are nevertheless under strain. Disposable incomes have been squeezed and real wages in the euro area have turned negative, reducing consumer spending power.
Barclays said that robust growth is the primary reason the ECB has moved away from previous cuts to what the bank described as an "insurance" posture, but added that higher energy costs are unhelpful and that further increases could raise concerns about potential policy missteps at the central bank.
On portfolio positioning, Barclays continues to favor exposure to capital expenditure-related sectors and banks rather than consumer-facing industries. The bank closed its underweight position on communication services. It cited structural themes - including strategic autonomy, AI-driven capex and German stimulus - as tailwinds for names benefiting from investment spending, while trimming its stance on the luxury sector to market-weight in light of higher oil prices and evidence of softer demand from China.
Regionally, Barclays maintains a preference for Germany over France, pointing to Germany’s stronger fiscal footing, an improving growth momentum and valuations that the bank describes as still undemanding.
What this means for markets
- European equity leadership has paused as energy costs and rate expectations shift investor priorities.
- Growth indicators and capex momentum provide countervailing support, especially in investment-related sectors and German corporates.
- Consumers remain vulnerable to lower real wages and reduced disposable income, which could weigh on consumer-facing companies.
Barclays’ view frames a market in which economic expansion and corporate investment are largely intact, but where the interplay of commodity prices, central bank policy and geopolitics is testing sentiment and sector positioning.