Risk appetite is returning, and Barclays shifts toward Growth and Momentum while avoiding Quality

Overview

This report is Barclays' May 2026 monthly update on U.S. equity factors. The core thesis is that strong Q1 2026 earnings season, continued AI infrastructure investment, and easing Iran-related energy concerns have pushed the U.S. market back into a risk-on environment. The S&P 500 rose more than 9% in April, and Big Tech rose more than 16%, with Growth outperforming Value in both large-cap and small-cap universes. The report shifts style allocation toward Growth, Momentum, and large over small while reducing preference for defensive or non-AI styles such as Value, Yield, and Quality.

Core views

Barclays upgraded Growth to positive, arguing that profit revisions in technology, AI, and energy have improved, that easing inflation expectations are friendlier to long-duration growth assets, and that both active and systematic flows support large-cap technology. It upgraded Momentum to positive; although the rally raises crowding and pullback concerns, it has the strongest earnings growth, valuations have not expanded excessively, and seasonality in May and June is favorable. Barclays kept Large-over-Small positive because large caps have stronger earnings revisions, operating leverage, and margin profiles, while some small-cap strength still appears more valuation-led than fundamental. It cut Value to neutral because its defensive and anti-AI attributes are no longer superior in a risk-on environment. It cut Quality to negative because investors are reallocating toward higher-beta semiconductors, hardware, and AI-related names, while Quality's growth characteristics are weak and valuation remains high. High-over-Low Volatility was upgraded to neutral because it rebounded sharply from an annual low and earnings improved, but valuation is already elevated. Yield remains neutral: there is no strong upside catalyst, but low valuation and light positioning can limit downside.

Analysis framework

The report uses Barclays' liquidity-weighted, full-market-cap U.S. factor baskets to examine long-short factor returns, sector exposures, earnings revisions, valuation percentiles, macro events, and market outlook. Factor views are mainly based on three pillars: a factor basket's fundamental performance relative to its own history, current macro events and historical event studies, and forward-looking market judgment.

Methodology notes

• Factor Allocation FrameworkBarclays U.S. Equity Factor Basket

  Liquidity-weighted long/short factor basket

  The report uses a liquidity-weighted U.S. factor basket across the full market-cap universe to capture factor premia while controlling stock and sector exposures. Size measures large-cap versus small-cap, and Volatility measures high-volatility versus low-volatility stocks.

• Factor Rating FrameworkPositive/Neutral/Negative Factor Views

  Factor add/reduce recommendations

  Positive means increase exposure to the factor, Neutral means keep exposure, and Negative means reduce exposure. The report view date is 2026-05-11.

• Fundamentals and Macro IntegrationEarnings, Valuation, Macro Event Triangular Analysis

  How factor views are formed

  The report combines NTM EPS growth, earnings revisions, valuation history percentiles, sector exposure, interest-rate and inflation expectations, energy shocks, AI capex, and flows to form factor views.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• Growth

  Upgraded to positive

  Strengths

  Technology, AI, and energy earnings revisions improved; inflation expectations softened; and flows into large-cap technology provide a near-term tailwind.

  Weaknesses

  The rate backdrop is not as supportive as before, with rate-cut expectations pushed out.

  Comparison

  Relatively better suited than Value in a setting of returning risk appetite and continued AI momentum.

  Risks

  Growth could come under pressure if risk appetite cools, AI/technology earnings disappoint, or rates rise again.

• Momentum

  Upgraded from neutral to positive

  Strengths

  NTM EPS growth is above 100% year-to-date; forward 12-month earnings is at the 93rd percentile versus the prior 12 months; and May and June seasonality is favorable.

  Weaknesses

  Rapid gains increase crowding risk and the risk of sharp reversals.

  Comparison

  Earnings growth is the strongest among all styles, while valuation percentile is still lower than most styles.

  Risks

  Momentum could suffer a sharp drawdown if the market withdraws from AI and technology positioning.

• Large-over-Small

  Maintained as positive

  Strengths

  Large-cap earnings revisions, operating leverage, and margin dynamics are stronger than small caps; mega-large-cap technology benefits from hyperscaler AI infrastructure spending.

  Weaknesses

  Recent small-cap rebounds have been substantial, and some industries may still be supported by AI capex spillover.

  Comparison

  Small caps look cheaper on headline valuation, but in several sectors the rise has been more valuation expansion than earnings growth.

  Risks

  Small-cap earnings could catch up and outperform in 2H26, or a fast decline in rates could produce a cyclical phase of small-cap outperformance.

• Value

  Downgraded from positive to neutral

  Strengths

  Persistently elevated long-end yields still provide some support.

  Weaknesses

  Defensive and anti-AI traits are not as strong in a risk-on market; weak consumer confidence suppresses its consumer-exposed segments.

  Comparison

  Compared with Growth and Momentum, it lacks AI and earnings-momentum catalysts.

  Risks

  Value could recover attractiveness if the market shifts to risk-off or AI trades unwind.

• Quality

  Downgraded from neutral to negative

  Strengths

  Traditionally has defensive characteristics.

  Weaknesses

  Sales and earnings growth traits are at historical lows; valuation remains high relative to U.S. equities; defensive demand weakens in a risk-on environment.

  Comparison

  The report prefers growth-oriented, trend-following styles such as Growth and Momentum.

  Risks

  Quality could regain appeal temporarily if macro shocks reintroduce demand for safety.

• High-over-Low Volatility

  Upgraded to neutral

  Strengths

  Rebounded about 31% from its year-to-date low; NTM EPS growth around 90%; earnings growth is starting to catch up with price performance.

  Weaknesses

  Forward PE is at the 71st percentile of the past 10 years, indicating a tighter valuation.

  Comparison

  Improved fundamentals mean the report no longer sees this as a short setup, but mixed sector exposure is still insufficient to justify positive.

  Risks

  High valuation and uneven sector exposure may limit further upside.

• Yield

  Maintained at neutral

  Strengths

  Forward PE is at the 15th percentile of the past 10 years; positioning is the least crowded, helping to contain downside.

  Weaknesses

  Returning risk appetite reduces its defensive and bond-substitute appeal; lower rate-cut expectations weaken cash-flow strategy attractiveness.

  Comparison

  Compared with Growth and Momentum, upside catalysts are weaker; however, valuation and positioning make a negative rating less justified.

  Risks

  If rates stay elevated and investors continue favoring risk assets, Yield may continue to underperform.

Key data

• S&P 500 April performanceup more than 9%Risk assets rebounded significantly in April.
• Big Tech April performanceup more than 16%Technology leaders drove a repricing reset, with Growth outpacing Value.
• Big Tech EPS surprise+15.6%Above the long-term median of +7.2%, indicating Q1 2026 earnings beat expectations.
• Big Tech year-over-year EPS growth+35.8%Fastest pace since 2Q24.
• Momentum NTM EPS growthmore than 100% year-to-dateThe report identifies it as the strongest earnings growth across all factors.
• Momentum valuation percentileforward PE at the 30th percentile of the past 10 yearsDespite price gains, valuation is still considered relatively cheap.
• High-over-Low Volatility monthly long-short return+18.9%Strongest monthly showing, supported by the return of risk appetite.
• High-over-Low Volatility forward PE71st percentile of the past 10 yearsValuation is elevated, so it was only upgraded to neutral.
• Yield forward PE15th percentile of the past 10 yearsLow valuation and light positioning support staying neutral instead of negative.
• April U.S. nonfarm payrolls115k, market expectation 65kJobs beat expectations, reducing urgency for Federal Reserve rate cuts.
• Unemployment rate4.3%Stable, supporting a view of elevated rates persisting longer.
• Fed rate-cut expectationonly one cut by end-2027A macro constraint for small-cap and yield-oriented strategies.
• Small-cap Q1 2026 EPS and revenue growthEPS 14.2%, revenue 12.0%Earnings only slightly above revenue, indicating limited operating leverage.
• Large-cap Q1 2026 EPS and revenue growthEPS 17.6%, revenue 7.6%Earnings clearly outperform revenue, indicating stronger operating leverage.

Impact & implications

The allocation implication is that U.S. equity styles should tilt further toward risk appetite, earnings momentum, and AI beneficiaries. Growth and Momentum are supported by strong earnings, AI capex, and capital flows, while large caps continue to show fundamental advantages over small caps. Conversely, the defensive attributes of Quality, Value, and Yield are becoming less attractive in the current market environment. Investors should still monitor medium-term headwinds, including elevated energy prices, declining crude and refined-product inventory buffers, delayed rate-cut expectations, and some factor valuations becoming richer.

Risks

• If energy prices stay elevated and crude and refined-product inventories remain thin, this could create medium-term headwinds for risk assets.
• The market currently expects only one Fed cut by end-2027, so higher rates for longer could pressure small caps, Yield, and longer-duration assets.
• Momentum and High-over-Low Volatility have already rebounded sharply; if crowded positioning reverses, a fast drawdown could follow.
• If AI and mega-cap technology profits disappoint, the case for Growth and Momentum exposure will weaken.
• In some small-cap segments, advances seem driven mainly by valuation expansion rather than earnings growth, making them more fragile when sentiment turns.
• Barclays discloses that it and related parties may have business relationships with covered companies, and investors should treat this report as one input in investment decisions.

What to watch

• Whether AI infrastructure capex continues to support semiconductor, hardware, energy, utilities, and industrial-related earnings.
• Whether SPX and Big Tech EPS revisions continue to rise in 2Q26 and beyond.
• Changes in U.S. inflation expectations, the 10-year yield, and Fed rate-cut expectations.
• Whether Iran-related energy shocks, oil prices, and inventory buffers again start influencing risk appetite.
• Whether Momentum earnings growth continues to outpace price gains, validating trend quality.
• Whether small-cap earnings in 2H26 improve as expected, and whether small-cap rallies in software, semiconductors, construction, and chemicals are earnings-supported.
• Whether Quality valuation falls to more attractive levels or risk-hedging demand rises again.