Barclays expects European corporate earnings to increase by 16% in 2026 and 10% in 2027, although its strategists anticipate a more restrictive environment for equity markets as global monetary policy shifts towards higher interest rates.
In a research note led by Emmanuel Cau, the bank said the end of the global monetary easing cycle is removing a source of support for equities, potentially limiting future returns and moderating economic growth.
The strategists noted that economic activity continues to benefit from fiscal spending and capital investment in artificial intelligence, infrastructure and strategic autonomy. Nominal economic growth also remains above nominal bond yields, according to the bank.
However, Barclays expects higher financing costs to place limits on debt-funded AI investment and contribute to wider differences in equity performance across sectors and companies.
Interest Rates Change Equity Valuation Conditions
The bank said rising government bond yields are increasing competition between equities, fixed-income investments and cash.
As interest rates move higher, Barclays expects investors to place greater emphasis on earnings performance, particularly as equity risk premiums have continued to decline.
The strategists said the investment environment now offers fewer advantages from holding equities solely because alternative assets provide limited returns.
Barclays expects corporate earnings to remain a principal factor supporting European stock valuations, with the current investment cycle contributing to continued profit growth.
The bank anticipates that third-quarter earnings growth will remain in double digits, although below the pace recorded during the second quarter.
Price-to-earnings ratios have also returned towards historical averages, according to Barclays, following recent market adjustments.
Market Positioning and Fourth-Quarter Prospects
Barclays said the combination of rising oil prices, higher bond yields and renewed fiscal uncertainty affected European equities during September, following gains earlier in the summer.
France has been a particular focus of fiscal concerns, although the bank does not consider the current situation comparable with the European sovereign debt crisis of 2011.
The strategists believe that investor positioning has become less extended, while seasonal patterns could provide some support during the final quarter of the year.
They also noted that equity markets have already adjusted to higher financing costs and energy prices through lower valuation multiples and reduced participation in market gains.
Current market pricing implies three to four interest rate increases by major central banks over the coming 12 months, according to Barclays.
In energy markets, improved crude oil flows have helped contain Brent prices, although uncertainty remains over the possibility of a sustained easing of tensions between the United States and Iran.
The bank therefore sees a limited possibility of further gains in European equities before year-end rather than a broad improvement in market conditions.
Barclays Maintains Regional and Sector Preferences
Barclays continues to hold a market-weight allocation to European equities relative to U.S. stocks.
Within Europe, the bank prefers Germany and peripheral markets over France, while Japan remains its principal regional overweight.
The strategists favour companies exposed to capital investment spending, alongside banking stocks. Barclays has also selectively increased allocations to telecommunications businesses with lower sensitivity to wider market movements.
By contrast, the bank maintains a cautious assessment of consumer, real estate and materials companies, reflecting their sensitivity to interest rates and energy costs.
Barclays said AI-related investment continues to support growth, although enthusiasm surrounding the sector has moderated as borrowing costs increase.
The bank’s forecasts suggest that European earnings could continue expanding through 2027, while higher bond yields and tighter monetary conditions may limit the extent of equity market gains.
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