Barclays warned in a note on Wednesday that while strong corporate earnings have so far allowed equity markets to absorb an increase in bond yields, the margin for error is narrowing as yields climb.
Analyst Emmanuel Cau told investors that year-to-date equity gains have been "driven primarily by strong earnings," pointing to blended first-quarter earnings per share growth tracking about 25% in the U.S. and 7% in Europe. Barclays noted that those readings are the highest since 2021 and 2022, respectively.
The bank also highlighted that full-year 2026 estimate upgrades have been materially above typical annual trends, but that those revisions are concentrated in particular areas of the market - namely energy and semiconductors.
Barclays argued that the earnings cushion has been instrumental in letting equities cope with higher yields. Importantly, the bank said yields have risen largely on the back of resilient U.S. economic data rather than solely from inflation pressures. In that context the note said: "As long as reflation backdrop and earnings resilience hold, TINA should continue to favour equities vs. bonds."
At the same time, the bank flagged a growing vulnerability. With the U.S. 10-year yield breaking above 4.5%, Barclays said rates are "approaching the pain threshold for equities." The note suggested that markets appear to be pricing a more hawkish stance from the Federal Reserve and the European Central Bank, and that concerns about fiscal loosening are contributing to higher term premia.
Barclays further cautioned that if oil prices continue to rise, the resulting tighter financial conditions could create additional pressure for risk assets. On strategy the bank retained a preference for Value-oriented positions, while warning that a stagflationary outcome could tilt the advantage toward defensive sectors and companies with stronger balance sheets.
The note also observed that a drop in oil prices linked to credible peace developments in Iran could have the opposite effect - pulling yields lower and broadening the equity market rally.
In sum, Barclays described robust earnings as the primary support for equities amid higher yields, but emphasized that rising term premia, hawkish rate expectations, and oil-driven tighter conditions are tangible risks that could test market resilience.