Barclays asks if equity markets are nearing the boiling point

Investing.com -- In a note on Friday, Barclays said stocks have held up well during the global bond sell-off, but it warned that rising yields are making equities a less obvious choice.

Bond volatility has jumped to its highest level since U.S.-Iran tensions in March, strategist Emmanuel Cau noted.

Stock market volatility, however, remains contained, with the analyst highlighting that price-to-earnings ratios have fallen over the summer, but bonds have also cheapened. As a result, the extra return stocks offer over bonds is near its lowest in decades.

"In short, the 'TINA' argument to own equities looks less compelling," Cau wrote.

Barclays notes that higher rates do not always hurt stocks, as much of the move reflects stronger growth and expectations that AI will lift the economy. Still, oil remains above $100 a barrel and major central banks are raising rates again.

"The key question is where is the breaking point?" Cau wrote.

Based on client conversations, Barclays said stocks have also been supported by hopes of U.S.-Iran de-escalation, though that remains elusive. It expects markets to stay on edge at least until third-quarter earnings season.

Barclays remains overweight equities relative to bonds. It cited resilient growth, positive earnings momentum and the economy's lower sensitivity to higher rates. However, it said the balance of risks has become less favorable.

Europe has been hit by higher oil prices, strong U.S. tech gains and fears that AI will disrupt its businesses.

Barclays stated that markets are now pricing in nearly four more European Central Bank hikes by the middle of next year.

The bank still sees resilient European growth and favors companies set to benefit from capital spending, along with banks. It recently added telecoms and insurers and reduced materials and luxury.

Original Article

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