Investing.com — According to strategists at Barclays (LON:), the “Goldilocks” scenario can continue to drive up stock markets if economic data remains favorable.
Global stocks have rallied about 15% since the summer's growing pains as recession fears faded and recent data suggested a new “Goldilocks” environment.
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The latest ISM manufacturing data showed significant improvement, with new orders increasing and prices paid falling. However, ISM services returned to normal levels after two months of unexpected strength.
Meanwhile, the “Trump trade” has eased as the {{23705|} } has fallen back to pre-election levels, the dollar has retreated from recent highs and expectations for inflation has moderated. This situation, Barclays notes, is “a good setup for stocks.”
Jobs data, to be released Friday, will provide additional information on the health of the U.S. labor market and possible policy adjustments from the Federal Reserve. Economists at Barclays forecast a strong rebound in employment to 275,000, suggesting a three-month rolling average of 170,000 per month.
“As long as the data is not too hot or cold, the Goldilocks scenario can continue to support stocks higher, in our view,” strategists led by Emmanuel Cau said in a note.
“Even though long-term equity flows have increased recently (mainly towards the US), systematic investors and hedge funds have not renewed their investments much after the US elections.
In Europe, political instability continued this week with the collapse of the Barnier government in France. Yet markets appeared relatively unscathed, with the OAT and indexes both showing resilience. Broader EU equity markets have also started to recover from their record underperformance relative to US stocks in November.
Barclays suggested that much of the negative news may already be priced in. The potential formation of a technocratic government in France could improve sentiment by increasing the likelihood of adoption of the 2025 budget.
According to the bank, this “would prevent the political crisis from turning into a financial crisis and would probably relieve French players sensitive to interest rates and the domestic situation.”
From a more general perspective, strategists highlight the extreme performance and valuation gap between Europe and the United States, which suggests the possibility of some catch-up in 2025. Factors such as broader reflation, reduced political risks in France and the possibility of an ECB rate cut next week could support this trend. However, they remain cautious about a significant reduction in the French risk premium in the absence of a clear catalyst.
Stock inflows slowed to $8 billion last week, marking the lowest level since the U.S. election and well below the $33 billion average seen since the start of November. This decline was attributed to slowing inflows to the United States ($8.2 billion) and emerging markets ($0.6 billion).
Europe saw its largest capital outflows since the start of October, with $5 billion in capital leaving the region.
