Investors' early enthusiasm tied to hopes for a ceasefire in the Middle East has ebbed, and Barclays' strategists say a clear, decisive step forward in peace negotiations is likely required before global equity markets can materially build on recent gains.
In a note circulated on Friday, the strategists led by Emmanuel Cau cautioned that while President Trump’s preference for a way out of the conflict may lean markets toward a quieter path, "further melt-up seems unlikely absent a decisive breakthrough in negotiations."
Barclays highlighted several supply-side developments that underpin this caution. Oil shipments through the Strait of Hormuz remain limited, inventories are drawing down, and the team sees physical tightness in the crude market as more persistent than current market prices reflect. "So every additional day of disruption shifts the balance of risk towards higher-for-longer energy prices and, eventually, demand destruction," they wrote.
The bank emphasized that this asymmetric risk profile is particularly significant for Europe, given the region's status as a net oil importer. Economic indicators for the euro area have soured - with economic surprises in negative territory - and Germany has revised down its 2026 GDP growth projection, halving it from 1% to 0.5%. The latest EU composite PMI also landed at its weakest level since November 2024.
German government bond yields have stayed elevated, the strategists noted, and inflation concerns appear to be a larger driver in the bond market than growth prospects. That dynamic makes the upcoming European Central Bank meeting a focal point for investors, according to Barclays.
Given the deteriorating growth outlook in Europe and the bank's constructive view on artificial intelligence, Barclays recently shifted its positioning to an Underweight stance on Europe relative to the U.S.
On the technology front, Barclays painted a more constructive picture. A resurgence of interest in AI-related demand has spurred substantial gains in memory and semiconductor equities. Those sectors have provided most of the upward movement in U.S. and Asian indices, while markets with lighter exposure to technology, such as Europe, have lagged.
During client meetings across Asia this week, Barclays reported broad bullishness around AI-driven capital expenditure and an expectation of sustained memory intensity. Most investors the bank spoke with anticipate ongoing earnings upgrades that would support the AI-exposed segment of the market.
The strategists observed that AI investment and hyperscaler capital expenditure "is still translating into tangible earnings uplift across the supply chain even if valuations/positioning look less forgiving."
Looking ahead, Barclays pointed to the coming week's corporate reporting schedule as a critical test of market conviction. Several major technology companies - Microsoft, Meta, Alphabet, Amazon, and Apple - are due to report first-quarter results and provide updates on their capital expenditure plans, which could clarify whether the earnings momentum tied to AI capex is sustainable.
Summary: Barclays warns that ongoing crude-market disruptions could restrict further equity upside without a meaningful diplomatic breakthrough in the Middle East, even as AI-related investment supports gains in memory and semiconductor stocks. Europe faces heightened vulnerability to the energy shock and slower growth, while the tech-heavy U.S. and parts of Asia have benefited more from the AI-led rally. The near-term test will come through major tech earnings and any developments in energy flows and negotiations.