Investing.com -- Equities have had a strong start to the year, with European stocks making a modest recovery following significant underperformance last year. However, Barclays (LON:BARC) strategists warn that the market is still vulnerable, particularly due to the unpredictable nature of Trump’s trade and domestic policies.
While Trump’s approach to international trade agreements with countries like Columbia, Mexico, and Canada confirms his transactional nature, the constant changes in policy could undermine investor confidence and affect decision-making processes.
Still, Barclays maintains that the fundamental drivers of the bull market, such as resilient earnings and growth-focused central banks, are still largely intact.
“Dealing with headlines for the next four years may prove gruelling for investors, but we advise looking through the noise and keeping a cool head,” strategists led by Emmanuel Cau said in a Wednesday note.
The firm acknowledges that tariffs are a significant uncertainty for Europe, but believes that the region has already accounted for a high-risk premium and could benefit from developments in AI and Big Tech, stabilizing economic data, and steady policy easing by the European Central Bank (ECB).
Other potential positive catalysts include the German election, a possible ceasefire in Ukraine, and reduced budget uncertainty in France.
In the US, policies that promote growth, like deregulation and tax cuts, could continue to support the market, but Barclays cautions that high valuations and early signs of weaknesses in the AI sector indicate that US equities “have little margin for error.”
Thus, the firm has reiterated a market weight (MW) stance between European and US equities.
Barclays has also adjusted its sector allocation, reducing risk exposure due to increased headline risk and significant outperformance in certain sectors. Specifically, the investment bank closed its underweight (UW) position in Telecoms and re-downgraded Autos to underweight.
Looking ahead, strategists expect global growth to slow moderately in 2025, with US growth remaining resilient thanks to consumer support from rate cuts, a strong labor market, and disinflation, despite the negative implications of Trump’s policies on growth and inflation.
European growth is projected to stagnate at around 0.6%, with potential support from further ECB cuts and a weaker euro, while China’s growth may decelerate to 4.3% amid trade tensions and weak domestic demand.
On valuation, strategists noted that while the current cyclically-adjusted price-to-earnings (CAPE) ratio suggests lower returns ahead, European equities remain below average valuations despite their recent recovery and continue to look attractive compared to credit and bonds.
“Geopolitics may see EU equities retain a high-risk premium, but we still see potential for a more modest re-rating as the cycle extends, and some of the tail-risks abate,” they concluded