In a client note distributed on Tuesday, Barclays argued that current valuation metrics should not obscure the investment case for U.S. equities. The bank’s analysis emphasizes that the S&P 500 is trading around 19x next‑12‑month (NTM) earnings per share, a level the firm describes as "an attractive entry point" when set against its forecast for 15% EPS growth in 2026.
Analyst Venu Krishna framed the view around three pillars. First, Barclays expects an improving macro backdrop. Second, the bank points to resilient corporate earnings and ongoing positive earnings revisions. Third, Barclays identifies a broad capex supercycle underway, with spending increases concentrated among hyperscalers as well as in the energy and defense sectors.
At the same time, the note cautioned that some valuation measures are elevated. Barclays acknowledged that the Shiller cyclically adjusted price‑to‑earnings (CAPE) ratio sits near 38x, a level the bank says "bears uncomfortable resemblance" to past peaks seen in 1999 and 2021. The bank reiterated the well‑documented relationship that CAPE "famously exhibits a negative correlation with long‑run equity returns," and warned that today’s distribution of stock‑level CAPE values could imply "elevated systemic risk across the large‑cap U.S. equity universe."
Despite that, Barclays contends the present environment differs materially from prior episodes of high CAPE. The note contrasts today’s setting - which it characterizes as featuring a relatively steadier Federal Reserve, improved financial conditions and continued constructive earnings momentum - with earlier periods when CAPE climbed amid tightening policy and weakening earnings.
Krishna also cautioned that CAPE measures can be misleading in rapidly evolving secular growth regimes. The analyst cited semiconductors as an example where a shorter‑term or "quasi‑CAPE" has offered limited predictive value because of fast earnings expansion in the sector.
On risks, Barclays listed stress in private credit markets and geopolitical pressure from Middle East tensions among concerns that could affect markets. Nevertheless, the bank judged these risks unlikely to derail the broader growth cycle that underpins its valuation stance. "The S&P 500 is trading at 19x NTM EPS for the first time in almost a year, which we view as an attractive entry point with respect to our forecast for 15% EPS growth in 2026. We see macro valuation support coming from 3 sides: growth, yields, and inflation," Krishna concluded.
Context and takeaways
- Barclays balances elevated long‑run valuation gauges against near‑term growth expectations and sectoral capex strength.
- Key sectors highlighted as drivers of the capex cycle include hyperscalers, energy and defense; semiconductors are noted for rapid earnings dynamics that can distort CAPE‑style signals.
- Recognized risks such as private credit stress and Middle East tensions are acknowledged but judged unlikely by the bank to halt the projected 2026 earnings expansion.