Fundamentals strong but market melt-up might be too fast, says Barclays

Investing.com -- While market fundamentals remain robust, the recent post-election stock market rally may have accelerated too quickly, creating the potential for an abrupt reversal if volatility spikes, according to Barclays (LON:BARC ) strategists.

Donald Trump’s victory in the latest US election has led to a swift rise in sectors like Financials , Industrials, and small-cap stocks. Barclays describes this reaction as reflective of a “Trump playbook” in action, drawing on similar market behaviors observed in 2016.

Still, this rapid momentum, particularly in growth-driven sectors, has pushed valuations to “lofty levels, and vulnerable to unwind in the event of a volatility spike.”

Year-to-date, momentum stocks have led the performance among investment styles, driven by strong fundamentals. Compared to 2016, these stocks are achieving faster growth in both sales and earnings, with margins expected to improve over the near term.

Barclays strategists note that momentum stocks tend to hold up well in environments with yield curve inversions and when stock volatility remains mild. Still, after a notable rally since September, valuations have started to appear “a bit stretched relative to history.”

They also highlight that large-cap stocks, which generally outperform small-caps in this type of environment, appear safer as small-caps may face headwinds from higher debt burdens and rising yields.

Sector-wise, Financials and Healthcare have traditionally benefited from a new administration, and their valuations suggest upside potential.

Financials in particular capitalized on a rising rate environment historically, however, Barclays’s team stresses that this tailwind is now absent. Furthermore, the earnings growth outlook is “modestly weaker” today, and 10-year max valuations suggest that the upside is already priced in.

Healthcare valuations, meanwhile, “are not cheap but less full, and sub-sector weighting could position the group to benefit,” strategists said.

Barclays also revised its impact analysis for Trump’s proposed tariffs, estimating that should half of his campaign tariff threats be implemented, S&P 500 earnings could face a reduced 1.5% headwind.

Source: Investing.com