Barclays expects European stock markets to fall 10% if oil prices reach $100.

Investing.com - Under the leadership of Emmanuel Cau, Barclays strategists stated that if escalating geopolitical tensions lead to a surge in oil prices, European stock markets could face further downside pressure.

The team pointed out that a spike in crude oil prices related to the expansion of conflict with Iran could severely drag down regional stock markets, especially in energy-dependent areas like Europe.

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Barclays estimates that if Brent crude rises to $100 per barrel, the pan-European Stoxx 600 index (SXXP) could fall to around 550 points, roughly a 10% decline from current levels. As of 10:56 GMT on Wednesday, the index was at 611.21 points.

Recent oil price surges reflect rising geopolitical risk premiums as the US-Iran conflict spreads with uncertain outcomes. This situation has begun to challenge what strategists call the market’s early “golden girl narrative,” which was previously supported by steady growth and ample liquidity.

Strategists also highlighted broader market pressures, noting that concerns over AI disruption are causing extreme divergence between expected winners and losers across sectors, while pressures in the private credit market are pushing risk premiums higher.

They pointed out that rising oil prices are intensifying fears of stagflation and prompting investors to reassess rate cut expectations. If inflation risks escalate, higher energy costs could lead markets to reduce pricing in some Federal Reserve easing expectations.

Despite recent pressures on stocks, strategists believe that, historically, geopolitical sell-offs are often temporary. They noted that markets tend to rebound after initial shocks related to Iran, especially within a three-month timeframe.

However, the team warned that volatility could remain elevated in the short term. “No need to be heroic; global equities are still near all-time highs, and without circuit breakers, cross-asset volatility could stay high,” they said.

They pointed out that equity holdings have begun to unwind, with early signs of capitulation among hedge funds and systematic strategies. However, record inflows into long-only funds this year suggest that there may still be room for further position adjustments if market pressures intensify.

“Since about 70% of US household financial assets are invested in stocks, we believe Trump is unlikely to tolerate a prolonged correction in the stock market before the midterm elections, nor will he tolerate disorderly rises in bond yields,” the strategists wrote, adding that the president’s focus on consumer affordability is not conducive to long-term energy shocks.

In the medium term, Barclays remains cautiously constructive on European equities, believing that corporate earnings and balance sheets remain resilient. The bank continues to expect European earnings per share to grow about 8% by 2026, provided geopolitical shocks do not evolve into long-term conflicts, with a mid-term target of 620 points for the Stoxx 600 index.

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