In a recent report, Barclays forecast a sharp slowdown in global and US growth, with the worst-case tariff outcomes potentially making even those projections too optimistic, prompting a rare shift in preference from global equities to core fixed income.
“The world is at a crossroads. Global growth is set to slow in our base case, as tariffs rise. If policy chaos and trade wars worsen much further, a recession is now a realistic risk across major economies,” said Barclays’ Ajay Rajadhyaksha.
Markets are bracing for the impact of the ongoing trade war as 2 April, dubbed “Liberation Day” by President Donald Trump, looms.
Despite a positive start to the year, market sentiment has shifted dramatically, with US equities now underperforming European and Chinese stocks, and the US dollar weakening against most major currencies.
Barclays analysts warn that markets are underestimating the risks posed by impending tariffs, which could serve as a major market driver over the next few weeks – if tariffs are aggressive and wide-ranging, risk assets will likely face significant headwinds, while exemptions or delays could spark a relief rally.
The banking giant expects US economic growth to slow to 1.5 per cent for calendar year 2025, with European growth projected at 0.7 per cent and China at 4.3 per cent over the same period.
The world economy, it added, should grow 2.9 per cent for the calendar year, a big slowdown from 2024.
Barclays’ baseline assumption is 30 per cent tariffs on China and about 10 per cent on all other US imports, which it described as “benign” relative to its “worst-case scenario” of blanket 25 per cent tariffs on Mexico, Canada and Europe, among others.
“We have been overweight global equities over fixed income for many, many quarters – even as valuations looked increasingly stretched. But for the first time in years, we find ourselves genuinely worried about risk assets,” Rajadhyaksha said.
Rajadhyaksha acknowledged that despite European equities’ strong performance in Q1, they remain closely tethered to US markets, prompting a shift towards global fixed income and a defensive stance in risk assets and FX.
“From an asset allocation standpoint, we recommend being overweight global fixed income to global equities, but with little enthusiasm. And cash allocations should be higher until policy clarity stages at least a mild comeback,” he said.
Barclays has revised its 2025 S&P 500 price target to 5,900 from 6,600, citing tariff-induced headwinds that are expected to slow US growth without triggering a full-blown recession. In a bullish scenario, easing trade tensions could push valuations to retest 12-month highs, but if all threatened tariffs are implemented, the index could slide into bear market territory.
This forecast is more cautious than that of peers like Goldman Sachs, which last week predicted the index would reach 6,200 by year’s end.
Last week, speaking to InvestorDaily, AMP’s Shane Oliver said the S&P 500, down roughly 5 per cent year-to-date, is set to close the year around 6,150.
While Oliver suggested long-term institutional investors, such as super funds, having seen the outperformance by Europe, might be thinking about a skew towards Europe, Barclays warned “the euro area economy faces a major near-term risk”.
“In the past, a rise in global trade tensions (2018, for example) has proven challenging for Europe’s open, trade-intensive, export-focused economies – and 2025 should be similar,” the banking giant said.
European equities, which have outperformed US stocks by roughly 16 per cent year-to-date, face profit-taking risks ahead of the 2 April tariff deadline, Barclays warned.
However, it noted that their direction of travel “remains good”, as the fiscal bazooka from Germany and appetite for reforms at the EU-wide level could be a regime change and restart the domestic growth engine that has been missing since the GFC.
Barclays said it has revised its 2025 EPS growth forecast for the Stoxx 600 to 4 per cent, maintaining a below-consensus outlook, while lifting its 2026 estimate from 4 per cent to 8 per cent.
The bank kept its year-end 2025 P/E target for Europe at 14.5x, noting that recent market re-ratings could be challenged by adverse tariff outcomes or a deeper US slowdown.
“Overall, we have a YE target for SXXP at 580 and for UKX at 8,900, reflecting higher EPS growth prospects in 2026 and beyond,” Barclays said.
In the event that a 25 per cent tariff on all euro area exports is imposed by the US, Barclays cautioned it could push the region into a recession and result in a 13–20 per cent earnings per share (EPS) hit for EU indices.
