How vulnerable are European stock markets to shocks in oil prices? Barclays provides an in-depth analysis.

Investing.com - Based on Barclays’ analysis, European equities’ earnings growth expectations have not yet fully priced in the impact of the Middle East conflict. The bank warned that if oil prices keep rising, they could push earnings growth toward zero and further weigh on valuation levels that are already under pressure.

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For FY26 in Europe, the consensus EPS (earnings per share) expectation remains at 13% year-over-year growth, but Barclays believes this headline figure masks the underlying reality. The bank said that after stripping out the base-effect in the autos sector, the underlying growth rate is closer to 8-9%.

Barclays has cut its own forecast to 6%, a view based on the assumption that oil prices stay in the $85-90 per barrel range. The bank warned that if oil breaks above $100, it would have a “non-linear impact” on earnings, and growth may be able to hold at most only in the low single digits.

At the same time, the broker’s economists cut their GDP forecasts for the euro area and the UK to 0.8% and 0.7%, respectively. They noted that the ECB now expects to raise rates twice rather than keep them unchanged, which makes “the trade-off between growth and policy more unfavorable in a backdrop of rising stagflation risks.”

However, according to the analysis from Barclays strategists, there is a mitigating factor: the current situation is different from 2022. While the rise in oil prices is comparable to the post-Ukraine-war increase, the increase in natural gas and power prices is much smaller, because Europe’s dependence on Middle East energy supplies is far lower than its reliance on Russia at the time.

After three years of stagnation, base-effect in earnings is also easier to achieve.

On valuation, since the outbreak of the conflict, Europe’s price-to-earnings (P/E) multiple has fallen 7% to 14.4 times, still above the 13.6x long-term median. The strategists said current levels broadly reflect expectations for a mid-single-digit EPS downgrade, but if the conflict continues, valuations could fall further.

“Under a scenario of continued oil-price shocks, valuation multiples could fall further. We think that if oil stabilizes above $100 per barrel, the SXXP could drop to around the 550 level. And if recession risk increases, the decline could be larger,” wrote the team led by Emmanuel Cau.

“Meanwhile, if the situation eases quickly, valuations could see some relief, with the P/E multiple rebounding toward levels close to the prior highs,” they added. The bank kept its 620-point base target unchanged.

In terms of sector positioning, Barclays frames the outlook as a binary war trade. An easing of the situation would benefit mining, banks, capital goods, and discretionary consumer sectors, because they are highly sensitive to GDP.

If tensions persist, consumer staples and the pharmaceutical sector are best positioned among defensive sectors. Since the outbreak of the conflict, stocks that benefited from escalation have fallen on average 7.7%, while recovery-oriented stocks have dropped 9.3%—showing resilience, but far from a safe level.

“Valuations for cyclical stocks are nowhere near depressed levels,” the strategists said, “so even in the event of escalation, they remain fragile.”

From a country-level perspective, Barclays is bullish on the UK equities market. The energy sector weight in the FTSE 100 reaches double digits, and domestic exposure is limited, making it more insulated. This dynamic was validated during the Ukraine war, when the index performed better than other major European benchmarks.

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