Barclays analyst Venu Krishna said in a Wednesday note that the market's latest rotation has exposed "fragility in the risk-on mood," leading the bank to update its factor views for both U.S. and European equities.
In its most recent Equity Factor Insights report, Barclays described Value and Yield as the current leaders in the rotation, with Momentum losing traction and European investors tilting back toward defensives. The bank's commentary reflects changing earnings expectations, positioning shifts and the uneven influence of themes such as artificial intelligence on market leadership.
For U.S. equities, Barclays continues to hold a Positive view on Growth. The bank points to what it calls "still-solid fundamentals, rising earnings expectations in Big Tech, and durable AI-linked demand" as the reasons for maintaining that stance, even as the rotation has increased market volatility.
Barclays moved its U.S. Value view to Neutral from Negative, noting that Value "continues to benefit from recurring AI-related rotation episodes and a more supportive inflation backdrop." The bank cautioned, however, that much of Value's year-to-date improvement has been driven by multiple expansion rather than by earnings growth.
The bank also turned more constructive on size dynamics in the U.S., upgrading its view on the large-over-small-cap pair to Positive. Barclays cited deteriorating small-cap earnings expectations, re-rated valuations for smaller stocks, and comparatively stronger fundamentals in Big Tech as the basis for that change.
Momentum was downgraded to Neutral. Barclays pointed to stretched valuations, weak relative EPS momentum, rising dispersion and the fading of AI-narrative support as reasons for reducing its enthusiasm for the factor. Quality remains Neutral in both regions, with the bank noting the style "still lacks catalysts."
On volatility and yield factors, Barclays is Negative on U.S. High-over-Low Volatility, referencing "deteriorating fundamentals" and "rising sensitivity to sentiment shifts." The firm also stays Negative on U.S. Yield, arguing that falling front-end rate expectations and high exposure to small caps create headwinds for that factor.
Turning to Europe, Barclays' note states that leadership appears to be shifting: Value remains resilient, Momentum is fading, and stretched positioning raises the risk of reversals. The bank's updated factor views reflect the interaction of earnings trends, valuation moves and thematic rotation across sectors and market-cap segments.
Key takeaways
- Value and Yield are leading the recent rotation, while Momentum is weakening and defensives are re-emerging in Europe.
- Barclays remains Positive on Growth in the U.S., supported by stronger earnings expectations in Big Tech and durable AI-linked demand.
- The bank upgraded U.S. Value to Neutral and large-over-small-cap to Positive; it downgraded Momentum to Neutral and remains Negative on U.S. High-over-Low Volatility and U.S. Yield.
Impact on sectors
- Technology - Big Tech earnings expectations underpin the Positive Growth view.
- Small-cap equities - Deteriorating earnings expectations and valuation shifts weigh on small-cap prospects relative to large caps.
- Defensive sectors in Europe - Renewed interest in defensives amid fading Momentum.
Risks and uncertainties
- Fragile risk-on sentiment - Rising sensitivity to sentiment shifts could increase volatility, affecting cyclical and growth-exposed sectors.
- Stretched valuations and fading narrative support - Momentum's downgrade reflects valuation risk and reduced tailwinds from AI-related flows.
- Fundamental headwinds for yield-sensitive factors - Declining front-end rate expectations and high small-cap exposure pose challenges for U.S. Yield strategies.