Investing.com -- Despite improved technicals that could support short-term rebounds, "rallies will likely be sold until Trump or the Fed pivot," Barclays analysts wrote in a note Friday.
While hard economic data and credit resilience suggest no imminent recession, the bank says concerns over Trump administration policies and stagflation risks are weighing on sentiment.
"YTD has brought almost a complete about-face from euphoric market sentiment in the weeks post Trump’s win," Barclays said, noting that U.S. equities have been hit hard, with Nasdaq and tech stocks down double digits from their highs, Bitcoin and the Magnificent 7 down ~20%, and the 10-year yield down ~50 basis points.
Barclays explains that the rapid reversal has led to forced de-grossing by investors, with systematic strategies and CTAs selling into the down market.
While these “capitulation” signals might provide some short-term support, Barclays cautioned against excessive optimism.
"We would not get too carried away this time around," the firm wrote.
At the macro level, there is "no recession yet, but uncertainty around Trump policy changes raises stagflation risk," according to the bank.
While job data, credit markets, and GDP growth remain resilient, Barclays warned that policy unpredictability and the ’uncertainty tax’ are dampening growth expectations.
The firm’s economists lowered their U.S. GDP growth forecast to 1.5% and raised their 2025 inflation estimate to 3% due to higher tariffs and policy uncertainty.
With the Trump administration signaling a willingness to accept “short-term pain” as part of its economic strategy, Barclays analysts see little reason to expect a market-friendly pivot soon.
Meanwhile, the upcoming FOMC meeting is seen as crucial, but with no clear signal of imminent Fed easing, equities may remain under pressure in the near term.