Barclays: European stock markets will experience a strong short squeeze after the ceasefire

Investing.com - With the Iran-U.S. ceasefire agreement reached, European stock markets are poised for a sharp rebound. Barclays said large-scale risk reduction by hedge funds and an aggressive seasonal trend could trigger a strong short-squeeze, but the firm warned that surging oil prices would cause lasting damage to economic growth and inflation.

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Barclays analyst Magesh Kumar Chandrasekaran said the ceasefire agreement “at least eliminates the worst-case scenario for now,” opening the door to further easing. He believes continued de-escalation is still the “most rational outcome,” because Trump faces political and economic pressure to end the conflict, while Iran needs to protect its oil revenues.

The market has been preparing for a binary outcome, as the relevant news changes every day. Chandrasekaran noted that if the conflict escalates into a full-scale war, the stock market could see an even larger drop.

The analyst said the ongoing oil shock has never been fully priced in; he pointed out that net long (LO) positions, valuations, and earnings expectations are still far from a surrender level.

With CTA and hedge-fund exposure down sharply, market sentiment bearish, and April’s seasonal factors historically favorable, Chandrasekaran said, “Stocks could see a strong short-squeeze and a beta rebound in the near term.”

However, he emphasized that the surge in oil prices will not quickly fully reverse, because energy infrastructure has been damaged and the final outcome of the conflict remains uncertain. GDP forecasts have already been cut, and interest-rate expectations have been raised significantly.

Barclays lowered its forecast for full-year earnings growth in Europe for 2026 from 8% to 6% (below market consensus), assuming average full-year oil prices of $85; however, if the average oil price reaches $100 or higher, earnings growth may end up roughly flat.

Valuation also leaves little room for cushioning. Even though the P/E multiple has retreated from the start-of-year highs, it remains above the historical average. Even so, Chandrasekaran said corporate fundamentals are still solid, and given worsening fiscal imbalances and the return of inflation risks, bonds are not very attractive.

On sector allocation, the analyst said cyclical stocks and rate-sensitive stocks may see relief in the near term. Looking longer term, he believes the conflict strengthens the case for Europe’s strategic autonomy in reconstruction, so he favors industrials, materials, and technology.

Chandrasekaran is cautious on the consumer sector and prefers bank stocks over insurers and diversified financials. By region, he said Europe, emerging markets, and Japan are more likely to see short-squeeze action in the near term.

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