Earnings upgrades will offset inflation concerns, Barclays says

The market rally has weakened but upgrades to earnings will help European equities withstand concerns over monetary policy and inflation, Barclays said.

The first quarter reporting season was one of the best in recent history with earnings rising 51% in the US and 83% in Europe with companies upbeat about their prospects, Barclays said. The market reaction suggested a log of this good news was already priced in, though.

Inflation is starting to unnerve markets but with earnings continuing to recover equities have become cheaper during the recent consolidation, Barclays said. The bank raised its December 2021 target for the Stoxx Europe 600 index to 465, implying "5% upside potential to fair value".

"Post-Q1 results, EPS momentum has accelerated further and consensus estimates have been raised," Emmanuel Cau, Barclays' head of European equity strategy, wrote in a note to clients. "As long as earnings are growing and central banks act with due care, we think equities will grind higher and dips should be bought."

High valuations mean cyclical shares are struggling to lead despite strong earnings, Cau said, and the differential compared with defensives remains very high. Despite its good performance value shares have got cheaper because of the strong rebound in earnings per share. Materials, energy, financials, autos and staples have all derated in 2021 and look attractive, Cau said.