Global stock markets climbed to fresh highs on Friday as investors responded positively to reports suggesting progress toward a potential agreement between the United States and Iran. However, European equities continued to lag behind their U.S. counterparts, remaining confined within a trading range that has persisted for roughly three months, according to a recent equity strategy note from Barclays.
Data from the bank showed that both the STOXX Europe 600 (SXXP) and the Euro STOXX 50 (SX5E) remained below the highs reached on 27 February, while the S&P 500 was trading approximately 9% above that level.
A deal could unlock a European market breakout
Barclays strategists believe that a formal agreement leading to the reopening of the Strait of Hormuz, combined with lower oil prices and easing bond yields, could provide the catalyst needed for European equities to move higher.
According to the report, such a scenario “could lead to broadening of performance and help EU equities to breakout from their trading range of the past three months.”
The bank noted that performance differences between sectors that have benefited from the conflict and those that have struggled remain unusually pronounced.
Since tensions escalated, energy, telecommunications, utilities and insurance stocks have outperformed, while consumer discretionary companies, mining groups and banks have generally lagged behind.
Consumer and rate-sensitive sectors could rebound
Barclays argued that the wide valuation gap between winners and losers leaves scope for a sharp recovery in some of the market’s weaker areas if geopolitical tensions continue to ease.
The bank highlighted sectors such as luxury goods, travel and leisure, automotive manufacturers and retailers as potential beneficiaries of a short-covering rally should investors become more optimistic about the outlook.
Many of these industries are particularly sensitive to changes in consumer confidence, interest rates and economic growth expectations, all of which could improve if energy prices retreat and inflation concerns moderate.
Space stocks emerge as a major market theme
The report also identified space and satellite-related companies as one of the strongest emerging investment themes in Europe.
Shares of businesses with exposure to aerospace, satellite communications and launch technologies have rallied sharply ahead of a widely anticipated major IPO in the United States.
Among the companies highlighted by Barclays were Eutelsat (EU:ETL), OHB (TG:OHB), Avio (BIT:AVIO), AAC Clyde Space (USOTC:ACCMF), GomSpace (LSE:0GE8) and Thales (EU:HO).
Investor enthusiasm has been driven largely by expectations surrounding a potential SpaceX public listing, which could become one of the largest stock market debuts ever recorded.
Higher oil prices may remain a risk
Despite the possibility of a relief rally among underperforming sectors, Barclays cautioned that any gains could prove temporary.
The bank’s macroeconomic team continues to expect oil prices to remain elevated for an extended period, keeping inflation risks in focus and potentially limiting the scope for lower interest rates.
At the same time, Barclays pointed out that previous energy shocks have often had only a temporary impact on crude markets.
“Energy shocks in recent decades have not had a lasting impact on oil, with prices falling sharply once the dust settled and excess supply increasing over time,” Barclays said, noting that current market positioning does not appear to fully reflect this historical pattern.
Fund flows reveal mixed investor sentiment
Investor flows also suggest a more cautious tone beneath the surface.
Global equity funds attracted net inflows of just $2.4 billion during the week, ending a streak of eight consecutive weeks of strong inflows. In contrast, fixed-income funds drew $30.5 billion.
Since the start of the year, bond funds have attracted $331.2 billion, while equity funds have gathered $361.0 billion, narrowing the gap between the two asset classes.
Within equities, Europe recorded net outflows of $2.3 billion both for the latest week and on a year-to-date basis.
Funds focused on Europe excluding the UK experienced a seventh consecutive week of withdrawals, losing $2.2 billion in the most recent reporting period.
Barclays also observed a continuing divergence in investor behaviour, with U.S.-domiciled funds reducing exposure to European stocks while European-based investors have continued buying U.S. equities for nine consecutive weeks.
Markets await key U.S. economic data
At the sector level, technology was the only global sector to record net inflows during the week.
Industrials and materials experienced the largest withdrawals, while within Europe every sector saw outflows except healthcare. Financials and energy stocks recorded the weakest investor demand.
Looking ahead, markets will closely monitor several important U.S. economic releases next week.
According to Bloomberg consensus estimates cited by Barclays, the ISM Manufacturing Index for May is expected to come in at 53.2 on 1 June, compared with a previous reading of 52.7.
Investors will also focus on U.S. non-farm payrolls data due on 5 June, where economists expect job growth of 95,000 compared with 115,000 in the prior report.
The outcome of these releases, together with developments surrounding a potential US-Iran agreement, could play a significant role in shaping market sentiment as investors assess the outlook for growth, inflation and interest rates.
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