© Reuters.
Barclays equity strategists reflected on the current market environment, which is characterized by surging real interest rates and a stronger , both regarded as generally unfavorable for risk assets.
“Absent a circuit breaker to the bond market, equities may continue to struggle, as rising x-asset volatility prompts more de-risking and cash is the only place to hide,” strategists wrote in a note to clients
However, the market remains oversold, and a modest positive Q4 seasonality may still be achievable, according to Barclays analysts.
This is because of factors like resilient U.S. economic activity, stabilizing growth in China, ongoing disinflationary pressures, as well as more reasonable pricing of .
Going forward, analysts note that the upcoming earnings season is crucial for equity performance.
“A positive outcome at Q3 results could set us up for a modest year-end rally (the pain trade for many), but arguably, any signs of weakness would provide fodder for the perfect storm, which seems closer to investor positioning/sentiment.”
Overall, the near-term risk/reward balance is finely balanced, but looking into next year, equities relative to other asset classes appear unexciting.
“In Q3, we stick to a barbell approach, broadly neutral Cyclicals/Defensives. Post the sharp repricing in rates and consequent surge in Value, some oversold long-duration plays may bounce. Yet we stay OW Value, as valuations vs. Growth have not fully adjusted to the higher-for longer rates regime, but a Quality tilt seems wise given rising credit risk,” the strategists concluded.
