Three reasons to stick with stocks despite rising yields, according to Barclays

By Nora Redmond

Now is not the time to derisk, according to strategists at Barclays.

Now is not the time to derisk, according to strategists at Barclays

Despite higher bond yields and spiking energy prices, there's still a case for keeping your equities, according to Barclays.

"If you stopped at the headlines, the obvious call would be to derisk, and wait for clarity," a team of strategists led by Ajay Rajadhyaksha, chairman of research at the London-based bank, wrote in a note published Thursday. "We are not doing that."

The comments come amid a challenging month for markets. The yield on the 30-year U.S. Treasury note BX:TMUBMUSD30Y hit 5.444% on Thursday - its highest level since 2004. The 10-year's yield BX:TMUBMUSD10Y reached 5.141% - its highest since 2007 - as investors increasingly believe the Federal Reserve will raise interest rates by one-quarter point again in its October meeting. Equally, oil prices (BRN00) (CL00) have remained elevated with no end yet in sight for the war in Iran.

Although the market landscape may not look great, three factors that matter most to stock returns are broadly stronger than they were three months prior, according to Barclays. One is U.S. corporate earnings, they noted, which grew by 30% in the second quarter.

Secondly, they said, the artificial-intelligence investment cycle is expected to drive further stock gains. Barclays said it sees capital expenditure among hyperscalers increasing to more than $1 trillion next year and to nearly $1.5 trillion in 2028. They also said they expect 20% of the cost of the AI build-out to come from external actors in 2027 - up from just 6% this year.

With every sector, excluding healthcare, reporting higher profit margins compared with a year earlier in the most recent quarter, the signs are already there that the economic effects are stretching beyond the hyperscalers alone.

The strategists added that a strong U.S. consumer likely means a boon for returns.

"The U.S. economy is proving less rate-sensitive than feared," they wrote. "And the U.S. consumer is still spending."

For Barclays, risks are still "real and very present." The team listed yen depreciation and the potential for any investment cycle to be disrupted by the unexpected as potential challenges.

"We are not dismissing any of this," the strategists said. "But the balance of evidence argues for leaning into the cycle rather than away from it."

They recommend technology, media and telecommunications, and industrial stocks in the U.S. because of their exposure to spending on AI and its infrastructure. The strategists forecast the majority of earnings upside within the S&P 500 SPX to be generated in these two industries.

For European equities, they remain constructive on capex-heavy industrials, tech and mining.

-Nora Redmond

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