Equities Facing Headwinds from US Election and Geopolitics: Barclays

Investment Outlook: Equities Face Challenges but Maintain Upward Momentum

While equity markets are currently at high levels, they encounter short-term challenges stemming from the upcoming US election and escalating geopolitical tensions, according to analysis from Barclays.

Despite these potential hurdles, the investment bank believes that the ongoing global cycle of interest rate cuts and stimulus efforts in China are likely to facilitate a soft landing for the economy.

In the immediate future, uncertainties related to tensions in the Middle East and the US electoral process could dampen risk appetite, possibly leading to a stagnation of markets throughout October. However, as long as the outcome of the election is clear and uncontested, Barclays strategists anticipate that subsequent clarity will encourage more decisive investment actions as we move towards 2025.

The firm identifies several key factors supporting an upward trajectory for equities.

Firstly, hedge funds and systematic investors still have capacity to increase their equity holdings in the coming months, particularly as rate cuts may prompt a shift away from cash towards equities, alongside favorable market trends typically seen after elections.

Secondly, signs suggest that the slowdown in US economic growth is nearing its lowest point, backed by rate cuts, a robust labor market, and decreasing oil prices, which are beneficial to consumers.

Thirdly, although China’s stimulus measures have been measured, Barclays predicts that more substantial actions are on the horizon, which should further bolster the economy.

Additionally, while the European economy may be stagnating, accelerated rate cuts are expected to help maintain domestic demand.

Regarding corporate earnings, the bank does not predict a collapse, but it advises caution, noting that achieving double-digit earnings per share (EPS) growth in 2025 may be challenging if global growth remains at normal levels.

Cyclical stocks have aligned with recent data trends; however, they currently appear tactically overbought due to a short squeeze influenced by actions from the Federal Reserve and China. Strategists are maintaining a neutral outlook on cyclical versus defensive stocks for now, though they suggest a potential shift towards more cyclical investments as we approach 2025.

Furthermore, Barclays plans to close their underweight position in the automotive and discretionary sectors, citing a favorable outlook for consumers. Conversely, they intend to take profits on banking stocks and reduce their overweight position to market weight due to weaker growth expectations in Europe and lowered interest rate forecasts.

On a regional basis, Barclays advocates for an overweight position in emerging markets compared to developed markets.