The market isn't fully pricing in a peace deal yet, as investors see no alternative to U.S. stocks, says Barclays

By Nora Redmond

Gold, bonds and international stocks have fallen behind U.S. equities since the start of the war in Iran, according to Barclays.

Since the beginning of the war in Iran at the end of February, there's been a preference for U.S. equities over bonds stemming from a TINA mentality - "There Is No Alternative" - to stocks, per Barclays.

"Strong earnings and rising inflation expectations mean that TINA is strongly favoring (US) equities over bonds," strategists at the London-headquartered bank led by Emmanuel Cau, head of European strategy, wrote in a note on Wednesday.

In the three months since the conflict started, the S&P 500 SPX is up 9%, hitting a new record closing high during Tuesday's session. Meanwhile, bond yields have been climbing in tandem as fears of rising inflation mount. The yield on the benchmark 10-year Treasury BX:TMUBMUSD10Y has risen to just under 4.5%, while the 2-year yield BX:TMUBMUSD02Y has climbed slightly above 4%.

Despite optimism growing among investors for a peace deal between Washington and Tehran, the market is not fully priced for the reality of that happening yet. U.S. stocks and oil have led the way in the past few months while gold, bonds and international stocks have fallen behind, the strategists said.

But with increased concerns about rising interest rates, institutional investors are now "extremely short on duration," they added.

"So if a peace deal is reached and oil drops, there may be room for a short squeeze to push yields lower, at least tactically," the strategists noted.

It comes as the U.S. and Iran continue to try to agree on terms for a deal to end the almost three-month conflict, with a cease-fire in place since April 8 and the Strait of Hormuz still effectively closed, wreaking havoc on the global supply of oil. On Monday, President Donald Trump said discussions were "proceeding nicely," although "self-defense" strikes on southern Iran were later confirmed, with its Revolutionary Guard Corps saying it reserved the right to retaliate.

The rest of the world is continuing to lose out from equity inflows mainly to the U.S., with outflows especially hitting Europe, where booming energy prices have hit activity, the note said. Front-month Brent (BRN00) (BRNN26) and West Texas Intermediate futures (CL.1) (CLN26) are both up about 30% since the start of the conflict.

"However, positioning is cleaner now and if oil drops in the event of a peace deal, we see potential for Europe to reverse its recent underperformance vs. the U.S.," the strategists wrote, adding that emerging markets as well as Japan would also likely benefit from negotiations leading to a deal if concerns regarding oil prices subsided.

If a peace deal is achieved, it leaves room for market broadening after concentration rose to its highest level in over two years this month, they said. They adding that while investors' interest in cyclical stocks in Europe has improved, there's still a wide gap between "AI enablers," or companies with high capital expenditure, compared to "losers," or those instead tied to consumers.

-Nora Redmond

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