Overview
Barclays is flagging a significant geographic and sectoral reorientation in global equity markets as AI-driven dispersion widens. In a client note, analyst Emmanuel Cau argues that extreme divergence tied to artificial intelligence is making Momentum strategies vulnerable to rapid reversals even as overall global equity indices continue to climb.
Sectoral divide and the HALO effect
Cau describes the market as split between industries perceived to be at risk from AI disruption and those seen as relatively insulated. He writes that "dispersion between 'old economy' sectors and the 'new economy' areas more exposed to AI disruption keeps growing," while noting the gap may be "arguably starting to look extended."
Barclays highlights Europe as a relative beneficiary of this pattern. The bank attributes part of Europe’s edge to what it calls the HALO effect - Heavy Assets, Low Obsolescence - arguing that markets with a larger weight in tangible-asset sectors are gaining from the AI-driven rotation.
Geographic rotation and market signals
According to Barclays, the AI-led dispersion largely explains the ongoing rotation from U.S. equities toward the rest of the world. The note points out that Europe has reached fresh highs while the S&P 500 and the Nasdaq are described as "struggling." The EU and U.K. markets, given their tilt toward asset-heavy sectors, are characterized as "benefiting fully" from the shift.
Investor behaviour and valuation dynamics
The bank notes several drivers prompting investors to reduce exposure to the tech-heavy U.S. market. These include worries about the durability of U.S. tech business models, the risk to white-collar jobs from AI, and exposure to private credit linked to software companies. Cau cites that "even strong Nvidia results this week failed to reverse the trend."
Barclays also flags valuation convergence as a major force behind the cross-market rotation, and raises the key question of whether "this valuation convergence will be validated by earnings convergence." That question underpins the bank’s caution around whether the current re-pricing will be supported by fundamental earnings performance across regions and sectors.
Conclusion
Barclays frames the current market environment as one where AI-induced dispersion favors asset-heavy, lower-obsolescence sectors and regions, particularly in Europe. The bank highlights both the reallocation of investor capital and the outstanding issue of whether earnings will eventually align with the observed valuation shifts.