Near-Term Market Fluctuations Expected Amid Policy Debates
Barclays analysts anticipate increased market volatility in coming months as investors assess the ongoing debate over the US government’s sweeping tax and spending legislation, along with the potential impact of recent trade tensions on upcoming Q2 earnings reports.
“With markets awaiting clarity on US fiscal policy, we expect near-term volatility to persist,” the analysts stated in a client note issued Wednesday.
Legislative Gridlock Over Trump’s Ambitious Economic Package
Republican senators are rushing to finalize an updated version of President Trump’s “grand and beautiful bill,” facing a self-imposed July 4 deadline to pass the comprehensive legislation. Lawmakers remain divided on spending cuts and borrowing increases needed to fund tax reductions alongside heightened defense and border security expenditures.
The most contentious issues involve proposed Medicaid cuts for low-income Americans and renewable energy tax credits. The House previously passed its trillion-dollar legislation version by a slim margin, with the GOP-controlled chamber narrowly overcoming opposition from dissenting Republicans and Democrats.
Should the Senate approve its version, the House would need to pass it again before the final bill can reach Trump’s desk for signature.
Trade Tensions and Earnings Impact
Barclays analysts noted that Q2 earnings reports may reveal the “first material impact” of Trump’s aggressive trade agenda. Since his January return to the White House, US effective tariff rates have risen significantly, though the president has postponed scheduled “reciprocal” tariff increases on most countries until July.
A new US-China trade agreement reached this week aims to revive the trade truce between the world’s two largest economies. US Commerce Secretary Howard Lutnick stated Tuesday that the deal would “substantiate” the previous agreement reached in Geneva, though some fragility remains despite easing concerns about escalating trade conflicts.
Investment Implications and Market Preferences
While acknowledging that uncertainty surrounding Trump’s tariff policies has “largely passed,” analysts emphasized that the broader economic environment remains “resilient,” with investors refocusing on artificial intelligence opportunities.
Led by strategist Venu Krishna, Barclays’ equity team now favors US stocks over international equities:
“Valuation advantages outside the US have diminished, with European/Asian large caps trading at similar 10-year percentile levels as their US counterparts. Stylistically, the US offers better quality exposure and lower volatility than Europe/Asia-Pacific.”
At current market levels, the analysts highlighted that:
- The valuation premium of non-US markets has significantly narrowed
- Quality metrics favor US large-cap companies
- Volatility profiles make American equities more attractive
- AI-related investment themes remain primarily US-centric
The bank maintains its preference for US equities while acknowledging potential risks from both fiscal policy uncertainty and trade developments.
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