Investing.com -- European equity markets could stage a sharp relief rally if the Iran conflict is resolved quickly, but face mounting downside risks if the Strait of Hormuz remains closed, Barclays said in a note Friday, framing the EU versus U.S. equity trade as increasingly a "call on oil direction."

Analyst Emmanuel Cau noted that European stocks have been stuck in a tight range for more than a month as investors remain torn between hope and despair over peace negotiations.

Market sentiment has been supported by renewed talk of a potential U.S.-Iran agreement, but headlines are shifting rapidly.

The underlying macro backdrop is deteriorating, Barclays warned. The latest European purchasing managers' indices fell to their lowest levels in two and a half years, missing expectations and signaling a clear loss of momentum.

While first-quarter earnings in Europe have been robust, the bank said weakening macro indicators make it difficult to justify further upgrades.

Barclays mentioned that the U.S. continues to benefit from energy independence and AI supercycle exposure, widening the gap with Europe in the current environment.

As long as energy prices remain elevated, the risk of demand destruction increases, and without a swift resolution, Barclays believes concerns about a European Central Bank policy mistake may begin to pressure the euro against the dollar.

Should peace materialize quickly, however, Barclays said "markets may look through near-term data softness, opening the door for a sharp relief rally in Europe, likely to be driven by cyclicals and banks."