Barclays warns that markets are showing a dangerous level of complacency. To sustain recent stock market gains, risk appetite requires a resolution in the Middle East.
The investment bank argues that equity market ebullience cannot continue without a shift in energy prices. Specifically, rising oil costs are threatening to undermine corporate profits.
Energy prices have remained elevated due to geopolitical tensions. Barclays notes that this creates a headwind for stocks as higher input costs compress margins.
If stocks are to keep rising, energy prices need to start falling, the firm says. Lower energy costs would ease inflationary pressures and support consumer spending.
The current market rally relies on expectations of easing monetary policy. But persistent energy inflation could delay central bank rate cuts.
Barclays points to the Middle East conflict as a key variable. A de-escalation would likely trigger a drop in oil prices, boosting equities.
Without such a resolution, the risk of a market correction increases. Investors should watch energy markets closely for signals on the market’s next move.
