Investing.com -- Barclays told clients in a note on Wednesday that investors remain overweight equities, but positioning is far less stretched than at its early summer peak, improving the setup for stocks into year-end.

Equity inflows stayed strong in September at $81 billion and are running at a record pace for the year, strategist Emmanuel Cau noted.

“But momentum is fading with funds seeing some outflows in recent weeks, while retail sentiment turned the most bearish this year, and macro hedge funds have largely exited longs,” Cau wrote.

Systematic investors are now seen as the main support, with risk-control funds near peak exposure amid low volatility.

"Overall, positioning stays overweight equities, but is far less stretched than early summer highs and more dispersed across investor groups," Cau added.

Stocks have followed the usual seasonal pattern, with negative returns and narrower breadth in September.

Barclays said fourth-quarter seasonality and midterm election dynamics typically point to a rebound. Even so, it noted that erratic price action suggests a lack of conviction despite persistent fear of missing out.

The bank said a year-end rally and a rotation back into Europe and cyclical laggards largely depend on oil prices falling or holding steady.

A U.S.-Iran breakthrough would boost both stocks and bonds. Barclays added that the risk of oil staying higher for longer looks more priced into bonds than equities, and it said cheap volatility makes downside protection attractive.

Rising rates are also testing the case for owning stocks. With the U.S. 10-year yield well above 5%, Barclays said the equity risk premium has compressed. That challenges the "TINA" argument, according to the bank.

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