Markets Weekly podcast

Julien Lafargue (JL): Welcome to a new edition of Barclays’ Markets Weekly podcast. My name is Julien Lafargue, Chief Market Strategist here at Barclays Private Bank, and I will be your host today, for what is the first edition of March.

Time flies and, as usual on the first Monday of each month, the latest edition of Market Perspectives, our monthly publication, has been released and is available on Barclays Private Bank’s website. We once again cover a wide range of topics, and today I’ll be joined by Dorothée Deck, Head of Cross-Asset Strategy, here at Barclays Private Bank, to discuss equity markets and the recent increase in dispersion that we’ve seen.

We talked about it a lot in our Outlook 2025, back in November, but this is still a very topical subject. For example, last week we saw the S&P 500, the Nasdaq, as well as the Russell 2000, extend their slide, with Big Tech was a major drag. In fact, all the Magnificent 7 were lower. 

In contrast, though, the equal-weighted S&P 500 logged a slight gain, and because it’s a new month and I’m in a good mood, I think we can also point out that last week’s performance of the FTSE 100 in the UK, which was up 1.7%, reached a new all-time high. This is a market that, in fact, Dorothée has been positive on for some time, and it looks like it’s starting to move in the right direction.

But, before we talk to Dorothée, let’s go back to the US. The underperformance that we saw was mostly driven by a wide array of news, that, taken together, has led to a risk-off mood. The focus was on the Trump 2.0 policy uncertainty, with the president reiterating his plans to impose 25% tariffs on Mexico and Canada later this week, and announcing a further 10% levy on Chinese goods.

There was also, of course, some focus on the ongoing difficulties in moving Trump’s agenda through Congress, and I wouldn’t be surprised if we soon start talking about a possible government shutdown after the expiration of spending authority, on 14 March.

If we look at the last week’s actual data, well, we got the January core PCE, the Fed’s favourite measure of inflation, which, to be honest, was a bit of an anticlimax, as it was largely in line with expectations. Remember, we already had the CPI and the PPI readings, which allowed us to extrapolate what the PCE would be like. There was, therefore, a bit more focus on the sharp monthly decline in February’s consumer confidence, which posted its largest monthly drop since August 2021. And looking at the detail, respondents seem worried about the labour market, which seems to be deteriorating, and the pessimism around future employment prospects, in fact, hit a 10-month high. 

Aside from that, there was also a noticeable jump in weekly initial jobless claims, although continuing claims printed slightly lighter than expected. But, in truth, you know, it wasn’t all that bad on the economic front, with solid headline January durable goods orders, in part, thanks to Boeing, but core capital goods were also ahead of consensus. 

So, all in all, economic surprises are now in negative territory in the US, ie the data has been, on aggregate, below economists’ expectations, which can signal two things. One, the fact that maybe expectations were a bit too high to start with, and the second is that US economic momentum is seemingly slowing, which could be the result of all the uncertainty we’re seeing on the geopolitical front. 

Interestingly, last week we saw the Atlanta Fed’s GDP tracker. So, basically this is a tool, designed by the Atlanta Fed, that aims to track GDP in real time. This can be a very volatile data series, but it is followed by market participants simply because, otherwise, you have to wait quite a long time to get the official GDP figure, potentially two to three months after the actual end of the quarter. And that number from the Atlanta Fed went negative, around minus 1.5% for Q1. That was after all the data we got from last week. So, although we would expect that number to be revised higher, it does feel like US growth is really starting to slow down.

Now, the other key piece of news came on Friday, with the meeting between President Trump and his Ukrainian counterpart. And while we were promised another “wonderful deal” on rare earth and other natural resources, what we got was a televised argument between the two leaders. An argument is a nice word, I would say in that context and, as a result, of course, no deal was signed and Zelensky left in a hurry. That clearly doesn’t sound good when it comes to the peace in Ukraine, but I would point out a couple of things.

First, Russia and the US reportedly met several times in Istanbul last week and discussed returning diplomats to each other’s countries, so there is still a line of communication, although it’s more on the Russian side than on the Ukrainian side. And also, I don’t believe that this deal is off the table, first and foremost because this deal, in the first place, is not really meaningful. 

If you think about it, we call those minerals rare, but they are plentiful, they can be found pretty much anywhere. There is a big focus on China, simply because of the country’s ability to refine those elements, but they are in the ground pretty much across the globe. And when you look at the map of Ukraine, the reality is that they are mostly in the territories that are currently occupied by the Russians.

Also, let’s not forget that this is a country that has been suffering a war for the last three years, where much reconstruction has to happen before you can even think about trying to exploit those natural resources. So, in the first place, that deal was not really a big deal for the US, but it was probably one way that Donald Trump thought he could sell continued support to Ukraine to his domestic audience, ie we are continuing to help Ukraine but, in exchange, we’re getting something out of it that is less abstract than just peace in Europe.

So, I would expect that this deal is going to be back on the table relatively soon. In fact, President Zelensky said over the weekend that he would be totally happy to sign that deal, and maybe just got a bit overexcited, so to speak, during the press conference. So, I don’t think we should necessarily read too much into what happened over the weekend, apart from the fact that it was a very interesting moment of television.

Now, before we move on to our guest speaker, just a final note on the Nvidia results that came out last week. Obviously, this was another key catalyst for markets, something that people were wanting to pay close attention to. In reality, results were stellar. The company is still delivering north of 60% earnings growth, which, given the size of the company, is quite an achievement. But the problem is that it wasn’t enough for demanding expectations, and the guidance similarly failed to impress investors. 

As a result, we saw some profit taking. Again, I wouldn’t read too much into that. It doesn’t mean that the AI theme is going away, it just means that expectations have to reset, and the reality is that Nvidia, as a stock, is becoming cheaper by the day. We’re talking about a price-to-earnings multiple that is in the neighbourhood of, you know, 25 times, which is clearly not outrageously expensive any more, and that’s simply the fact that the stock has been treading water for the past few months, whereas earnings have kept going at a pretty strong lick.

So, since we’re talking about earnings, maybe that’s a good time to bring you in, Dorothée. So, first of all, thank you very much for coming in. As I mentioned in my introduction, we have just published a new edition of Market Perspectives, and in that particular edition you talk about dispersion within equity markets, which was a key theme in our Outlook 2025. 

So, I’d like to hear more on that, but since we were talking about earnings and Nvidia, I believe Nvidia was pretty much the official end to the earnings season, I think we’re 95% or 99% done, so can you provide us with a bit of a recap as to what you saw in this earnings season. Any major takeaways this quarter?

Dorothée Deck (DD): Hi, Julien. Thanks for having me. So, yes, I mean it’s been a very interesting quarter. As you mentioned, most companies have now reported, and this season has been seen as a bit of a test for markets for a number of reasons. Equities are trading at historically high valuations, market leadership has been extremely concentrated, and the macro and political backdrop remain highly uncertain.

The good news is that earnings have been stronger than expected. So, in the US, earnings are up 13% year on year, 7% ahead of analysts’ forecast. And in Europe, they’re up 2%, or 3% ahead of expectations. Encouragingly, as well, those results reflect a combination of revenue growth and margin expansion.

Now, in both regions, the energy sector was a considerable drag on earnings, driven by a 10% drop in the average price of oil over the period. If we exclude the energy sector, earnings would have been up 16% in the US and 11% in Europe. So, that’s a significant impact.

Interestingly, in the US, the tech and communication services sectors have been key contributors to overall earnings growth, but what we’re seeing is that the gap between the earnings growth of the Magnificent 7 and the rest of the market has continued to narrow. 

Despite those positive earnings surprises, analysts have also trimmed their estimates slightly for 2025 due to the lack of visibility over the coming quarters. So, they now expect corporate earnings to rise by 12% this year in the US and by 7% in Europe.

JL: Great. So, I guess the main takeaway is that earnings were rather good last quarter. However, this is looking back at the past, and I guess it’s not sufficient to decide whether this was a good earnings season or not. I think what you need to see is what stocks have done. So, how do you feel that the market has reacted to last quarter’s results?

DD: Well, the market reaction has actually been very muted, and this in itself is quite interesting. Normally, when companies beat analyst expectations we tend to see their stock price outperform, but this quarter, in the US, the companies that exceeded expectations didn’t see much of a reward, so their stock prices performed in line with the market on the day following the results.

On the flipside, the companies that missed expectations underperformed in line with historical patterns, and this suggests that US equities were priced for perfection going into the results and failed to impress, either though earnings delivery or forward guidance.

Although in Europe, there wasn’t a clear trend, stocks performed more or less in line with the broader market, regardless of whether earnings had surprised positively or negatively.

Now, if we take a step back and look beyond just the earnings reports and the press reaction that followed, we’ve noticed a sharp increase in the dispersion of equity returns in recent months, and this is true across the board, in the S&P 500, in the STOXX Europe 600, and even in the Magnificent 7. So, for example, Meta is up 14% year to date, but all the other Magnificent 7 stocks are down, with Tesla down 27%, and Alphabet down 10%. 

This level of dispersion in such a short period of time is remarkable. What it tells us is that investors are becoming more discriminating. Equity valuations look stretched and are unlikely to expand much further from here, which means that future gains are really going to depend on earnings growth, and this is why investors are focusing more on company fundamentals than before.

JL: So, you expect the rising dispersion trend to continue, right?

DD: Yes, definitely. The trend is here to stay and I would say there are a couple of reasons why. First, the rise in dispersion that we’ve seen in recent months has actually coincided with a significant increase in economic policy uncertainty, as measured by the news flow indicators.

Clearly, this uncertainty is likely to persist for some time, around trade, monetary and fiscal policy, and some companies will be more exposed to those policies than others. And second, with AI technologies being more widely adopted, it will create another layer of differentiation at the stock level.

The good news for active investors is that more dispersion means more opportunities to generate alpha, in a market where broad-based returns might be harder to achieve. For investors looking to benefit, selectivity is key. So, we continue to see more opportunities at the stock level, rather than the index level. 

With global growth slowing and yields normalising, we would continue to focus on high-quality stocks that are trading at a reasonable price, so, companies with strong profitability, stable earnings and solid balance sheets. 

Now, given the level of uncertainty, it’s also important to maintain a diversified portfolio, across sectors, across regions and investment styles, and hedging downside risk where possible, option strategies or structured products can also help to mitigate potential losses.

JL: Yeah, and I want to go back to this point of downside risk, simply because, as we saw, in particular in the US, the beginning of the year has been, let’s put it nicely, challenging, in particular for the stocks that used to be the darlings, the Magnificent 7. This risk-off scenario, or this risk-off mood, that we’re seeing in markets, do you expect this to continue? And what were the main drivers leading to this poor performance of the US market?

DD: Yes, absolutely. So, we’ve seen a sharp sell-off in risk assets over the past few trading sessions, as the narrative has shifted away from inflation risk towards growth fears, and even recession risk. So, US 10-year yields have declined sharply, from 4.8% in mid-January, to 4.2% today. Over the same period, US stocks have underperformed bonds by 7%, while cyclical sectors have lagged defensive ones by 4%, which is another clear sign of this risk-off sentiment.

And, finally, retail investor sentiment has also dropped to its lowest point in two-and-a-half years. The main drivers behind those moves include weaker-than-expected economic data in the US, as you mentioned earlier, notably in retail sales, consumer confidence, jobless claims and inflation-adjusted consumer spending.

In addition, as mentioned previously, policy uncertainty has risen, particularly around trade tariffs, government spending and tax policies. So, there are many moving parts, and it’s really difficult to figure out how much of this is negotiation tactics and how much will actually be implemented, and when. The timing and sequencing of those policies matter as well. Ultimately, what’s important for markets is how those policies will impact global growth, inflation and yields.

And finally, the DeepSeek announcement in January also raised concerns around Big Tech, and US exceptionalism more generally, shaking investor confidence in the broader markets.

JL: Excellent. Look, credit where credit’s due. If I go back to our Outlook 2025, we discussed a lot of the issues that are transpiring right now, in terms of, you know, demanding valuations and a broadening of the leadership, in particular in the US. Those expectations, that seemed very high when it comes to US economic momentum, as well as the US equity market, and those have started to play out, so kudos on that. But I guess that we need to look forward, and maybe what people want to hear is what do you think they should be doing now and in the future? So, what would you say to someone asking about how they should be positioned?

DD: So, in the current environment, we would continue to favour defensive sectors over the more cyclical ones, so, typically, sectors like consumer staples and utilities, which tend to outperform in periods of slowing growth and declining yields. These sectors are particularly attractive in Europe right now, based on valuations.

Having said that, for diversification purposes, as mentioned earlier, it also makes sense to maintain some limited exposure to cyclical stocks, but we would be very selective in this space. We would focus on deep-value cyclicals, rather than high-growth, highly-valued stocks. So, specifically, we like the energy sector, which has underperformed recently and is trading on attractive valuations. Interestingly, this sector has also lagged its historical relationship with yields and energy prices.

So, to summarise, I would say that selectivity and diversification remain critical in the current environment. Stocks have been trading less in sync with each other lately, as investors’ attention has shifted back to company fundamentals. And this rise in dispersion is here to stay. It will create more opportunities for active investors to generate alpha, in a market where we see limited upside at the index level.

JL: Excellent. Well, thank you again for coming on the podcast Dorothée. There’s a lot more in Market Perspectives in the piece you wrote. There is also a lot more about other topics, but thank you again, and we’ll get you back very soon.

Now, to conclude, looking at the week ahead, a few things to note. It’s going to be a week where, unfortunately, US tariffs will dominate the headlines once more. We have this deadline, that was confirmed after being pushed back in some comments, but confirmed by Donald Trump, around tariffs for Mexico and Canada, 25%. Those should come into effect on Tuesday, alongside an additional 10% tariff on Chinese imports.

Now, Tuesday is an important day, not only because it’s the day that this deadline comes to expiration, but also because this is when President Donald Trump delivers his State of the Union address, in front of Congress in the US. This would make for a wonderful forum for the president to take a victory lap on Canada and Mexico, at least that’s what seems to be being suggested by some of his close advisors. 

So, are we going to see the 25% tariff? Maybe. Maybe we’re going to see a lower tariff than that being imposed. We’re definitely going to hear a lot more about tariffs, and I would suspect that if any tariff on Mexico and Canada were to be imposed as of Tuesday, they probably wouldn’t be active for too long.

We’re also going to get some very interesting macroeconomic data in the US, including the February ISM manufacturing survey earlier in the week, followed by the services survey later in the week. And this being the first week of the month, well, we’re also going to receive a lot of information on the health of the US labour market, starting with the ADP private payrolls, followed by the usual weekly jobless claims and, to conclude the week, with potentially some fireworks, we’re going to get the nonfarm payroll for the month of February.

Here, the consensus is looking for around 160,000, 170,000 net-new jobs creation, following a weaker-than-expected January reading of 143,000. So, by the end of this week, we should get a better sense as to whether those concerns around US growth are grounded in some economic reality, or if, for now, it’s just sentiment that is being impacted by all this geopolitics, as well as trade uncertainty.

Of course, we will be back next week to debrief all that but, as always in the meantime, we wish you the very best in the trading week ahead.