Corporate earnings may need to provide greater support for stock prices as rising bond yields and higher market volatility create a more challenging environment for equities, according to Barclays strategists.
Rising Bond Yields Pressure Stock Markets
Global equity markets endured another volatile week. Investors responded to higher oil prices, concerns about the Federal Reserve’s ability to control inflation, and doubts over whether technology companies can maintain their current levels of capital spending.
The Federal Open Market Committee meeting attracted most of the market’s attention. Before the decision, traders were pricing in an approximately 40% chance of an interest rate increase.
Barclays strategists said Federal Reserve Chair Warsh appeared more willing to let long-term Treasury yields tighten financial conditions. As a result, the threshold for additional interest rate hikes may now be higher in the near term.
Oil Prices Rise as Inflation Expectations Remain Stable
Oil prices climbed above $90 per barrel amid renewed tensions between the United States and Iran.
However, Barclays noted that market-based inflation expectations showed little movement. Instead, uncertainty surrounding the Federal Reserve’s policy approach pushed real yields higher and increased volatility across the bond market.
The pressure has been particularly noticeable among longer-term government bonds.
At the same time, companies are issuing more long-duration debt. Large corporations and hyperscale technology businesses account for a significant share of this increase, potentially competing with government bonds for investor demand.
Earnings Must Provide More Support for Stocks
Investor positioning remains elevated, while real yields, term premiums and the supply of long-term bonds continue to rise.
According to Barclays, this combination is beginning to weigh on equity markets. Therefore, corporate earnings will need to play a larger role in supporting stock valuations and driving future market gains.
So far, earnings have remained strong.
Second-quarter earnings per share growth in both the United States and Europe is running at its fastest pace in four years. This performance has helped major stock indices remain close to record highs.
Investors Rotate Toward Value Stocks
Although headline indices remain resilient, activity beneath the surface of the market presents a more complicated picture.
Market leadership has started to shift away from growth companies that are highly sensitive to interest rates. These stocks often depend heavily on the value of future earnings and can therefore come under pressure when bond yields rise.
Barclays said this rotation supports its preference for value stocks. The bank also maintained its long-standing overweight position on the banking sector.
Banks can benefit from higher interest rates and wider lending margins, although the overall effect depends on economic conditions and credit demand.
Technology and AI Stocks Face Heavy Selling
Technology stocks have experienced significant pressure since early June.
Barclays described the recent momentum reversal as particularly damaging for artificial intelligence companies and hyperscale technology businesses. The Nasdaq briefly entered correction territory, while the combined performance of major hyperscalers approached bear-market levels.
However, the strategists said the decline appeared to be driven mainly by investor positioning rather than a major deterioration in company fundamentals.
Many AI, semiconductor and hyperscaler companies that have reported earnings delivered solid results. Several also increased their capital expenditure forecasts beyond analysts’ expectations.
More Volatility May Be Ahead for AI Stocks
Despite strong earnings, Barclays warned that the process of reducing positions in popular AI and momentum stocks may not be finished.
This means further volatility and selling pressure could still emerge across the technology sector.
Nevertheless, resilient technology earnings may help limit the downside. Strong company results could provide support following the recent broad and indiscriminate sell-off.
Overall, rising bond yields are making the outlook for equity markets more difficult. With valuations under pressure, corporate profits will need to remain strong to keep major stock indices near their current levels.
