The recent narrative in the European equity market has shifted rapidly from a Goldilocks scenario to abrupt panic-selling, however, Barclays (LON:BARC) strategists believe the severe market reaction is “overdone.”
They point out that outsized market moves have been amplified by overextended and often leveraged positions, along with the unwinding of carry trades in sectors like technology, Japan, and crypto. However, they note that technicals now appear oversold, positioning is cleaner, and the current level of the Japanese yen seems fairer.
The strategists also highlight a growing realization that AI revenues may take longer to materialize while capital expenditure investment continues, impacting the crowded Big Tech space.
“Less froth is healthy, valuation has improved, and EPS momentum remains resilient,” they said in a note.
While acknowledging that growth is softening globally, they note it is not collapsing. Not all recession indicators are signaling a downturn; the private sector remains in good shape, credit has not tightened significantly, and companies are not overly pessimistic about the outlook. Post (NYSE:POST) pullback, equities have undershot earnings per share (EPS) revisions.
Although they see a high bar for an emergency rate cut, Barclays believes the Federal Reserve is likely to join the global easing cycle soon. This, they argue, "should provide a welcome backstop to the economy and confirm the mid-cycle scenario."
Summer markets are notoriously tricky, and the recent volatility may continue to have effects for days or weeks, as the process of degrossing might not be over.
“Price action may thus stay erratic, while US elections will likely keep markets on their toes into the fall,” they wrote.
Overall, analysts find the recent indiscriminate selling exaggerated and suggest selectively buying the dip.
They upgrade the European technology sector to Overweight following a 16% pullback since mid-July.