Investing.com -- Equity markets may feel stretched, but positioning data suggests there is still room for a meaningful rally if an Iran peace deal materializes, according to Barclays, which said cross-asset positioning has not returned to pre-war levels.

In a note, analyst Emmanuel Cau said hedge funds and commodity trading advisers have raised equity exposure back to highs, but in a narrow and concentrated manner.

Long-only flows moderated to their lowest levels since January, retail participation has been soft, and active manager survey data shows some pullback in exposure.

Barclays concluded that while "it does feel that 'everyone is worried, but nobody wants to be short,' overall positioning is not extreme and dry powder remains."

The U.S. versus Europe trade is said to remain heavily skewed toward the U.S., with Europe seeing accelerating outflows as the energy shock hits activity.

However, Barclays said positioning in Europe is now cleaner, and "if oil drops in the event of a peace deal, we see potential for Europe to reverse its recent underperformance vs. the US." Emerging markets, Japan and bond markets could similarly benefit from lower oil and yields.

On the risk side, Barclays flagged rising IPO supply as a headwind for U.S. equities, noting the current pace puts 2026 on track to be the largest year for IPO volumes since 2021. Momentum also remains crowded despite some trimming, while flows into technology and semiconductors look extended.

Barclays identified the key pain trades as equities down, bonds up, Europe and rest-of-world outperforming the U.S., and AI enablers declining while consumer plays and bond proxies recover.