Barclays warns: If oil prices stay around $100, European stock markets face downside risk

Investing.com - Barclays’ latest analysis indicates that if oil prices remain around $100 per barrel, European stock markets could experience a pullback.

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Although tensions surrounding Iran have caused significant volatility in oil prices, the stock market currently appears relatively calm, suggesting investors expect supply disruptions to be short-lived.

“Markets are not overly concerned about stagflation,” said Emmanuel Cau and his team of strategists.

They added that this mild reaction implies the market believes the likelihood of sustained supply shocks is low. Barclays estimates that investors currently assign about a 25% probability to a major energy supply disruption, with global stocks only falling about 3 from their peak, compared to an average decline of around 12% during past supply shocks.

However, strategists warn that if oil prices stay high longer than expected, risks could increase. They compare the current situation to the energy shock triggered by the Russia-Ukraine conflict in 2022, noting that if crude oil prices remain near current levels, the European STOXX 600 index could face significant downside pressure.

“Assuming the market’s sensitivity to oil prices is similar to 2022, we believe that if oil stays around $100 per barrel, the SXXP could fall to 550 points,” they wrote.

Rising oil prices often support profits in certain sectors, especially energy, but strategists warn that supply-driven shocks could also dampen economic growth and offset these gains. Since about one-third of global oil supply comes from the Middle East, the region remains exposed to energy supply risks.

Barclays also highlighted potential impacts on corporate earnings. The market consensus currently expects European earnings per share (EPS) to grow about 11% this year, but strategists say this outlook could deteriorate significantly if oil shocks persist.

“If EU GDP growth stalls and oil prices stay around $100 per barrel, European EPS growth could fall to single digits,” they noted.

An increase in energy prices could also prompt central banks to adopt a more hawkish stance, putting valuation under pressure. Currently, European stock market valuations are above long-term averages, and if inflation risks persist, further valuation declines could occur.

Barclays states that sector performance has already begun to reflect a more stagflationary environment, with energy, utilities, and healthcare outperforming the broader market, while financials and other cyclical sectors lag behind.

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