Risk appetite has returned, Barclays rotates to US Growth and Momentum, and remains constructive on Europe Value
AI summary card
Risk appetite has returned, Barclays rotates to US Growth and Momentum, and remains constructive on Europe Value
The report argues that strong US earnings, technology and AI momentum, and flow support are driving a rebound in risk assets, recommending a higher US exposure to Growth, Momentum and large-cap versus small-cap, while viewing Value as the main beneficiary in Europe after Momentum spillover.
- In the US, Barclays is constructive on Growth, citing improving risk appetite, stronger-than-expected technology and AI earnings, and continued active and systematic flows into large-cap tech.
- US Value was downgraded to Neutral because its defensive, anti-AI character is less attractive as risk appetite returns, and weak consumer confidence also hurts its consumer-exposed exposure.
- US Momentum was upgraded to Positive because the uptrend has earnings support, valuations remain in a low decile over the past 10 years, and seasonal factors are favorable from May to June.
- In Europe, Momentum remains supported by AI and earnings but is becoming crowded; if leadership broadens, Value may benefit from stronger earnings momentum and negative correlation with Momentum.
Report interpretation
Overview
This is a Barclays global equity factor strategy monthly report covering US and European stock factor views for May 2026. The main storyline is that US risk appetite returned sharply in April, the S&P 500 rose over 9%, large-cap tech rose over 16%, and stronger-than-expected technology and AI-related earnings reasserted Growth and Momentum; in Europe, Momentum remains strong but more crowded, while Value is still favored for earnings improvement and potential rotation potential.
Core views
US factor positioning has shifted toward higher risk appetite: Growth was raised to Positive, Momentum raised to Positive, Large-over-Small kept at Positive, Value lowered to Neutral, Quality lowered to Negative, and High-over-Low Volatility raised to Neutral. European factor views are unchanged: Value Positive; Neutral Momentum, Quality, Growth and Small Caps; Negative Low Volatility. The report emphasizes that current conditions favor styles with earnings support, growth, trend and large-cap exposure rather than purely defensive or anti-AI styles.
Analysis framework
The report uses Barclays liquidity-weighted factor baskets and combines relative fundamental performance of factor baskets, macro-event and historical-event studies, and forward-looking market outlook to form views. In the US section, it focuses on Growth, Value, Size, Momentum, Quality, Volatility and Yield in terms of performance, valuation, earnings revisions, flows and sector exposure; in the Europe section, it focuses on whether Momentum spreads, whether 1Q earnings season supports Value, and whether peace progress puts pressure on Yield exposure.
Methodology notes
Liquidity-weighted factor basket
The report states that its US and Europe factor baskets aim to capture factor premia while controlling stock and sector weights, and measure long-short factor performance by total return.
Relative fundamentals, macro events, market outlook
Barclays mainly uses three criteria to form factor views: relative factor fundamentals versus the basket's own history, current and historical event research, and forward market outlook.
Positive, Neutral, Negative
Positive means increase exposure to the factor, Neutral means maintain exposure, and Negative means reduce exposure; the US views in the report are dated 2026-05-11.
Asset mapping & comparison
Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).
- US Growthpositive allocation
- Strengths
- Risk appetite has returned, technology and AI earnings have exceeded expectations, TMT and Energy earnings revisions are relatively strong, and active and systematic flows continue to support large-cap tech stocks.
- Weaknesses
- The interest-rate backdrop is not as favorable as before, and reduced expectations for cuts could pressure valuation of long-duration growth assets.
- Comparison
- Compared with Value, Growth benefits more from the current AI and tech trend.
- Risks
- If AI earnings disappoint, rates rise again, or risk appetite reverses, Growth could come under pressure.
- US Valueneutral allocation
- Strengths
- Elevated long-end rates still provide some relative support, and some valuations may not be expensive.
- Weaknesses
- Under returning risk appetite and AI-led markets, Value’s defensive and anti-AI attributes lose appeal, and weak consumer confidence also hurts consumer-linked exposures.
- Comparison
- Compared with Growth and Momentum, Value is disadvantaged in the current US market backdrop.
- Risks
- If the market shifts back toward risk-off conditions, Value may regain relative appeal; but if technology continues to lead, Value may continue to lag.
- US Large-over-Smallpositive allocation
- Strengths
- Large-cap earnings revisions, operating leverage and margin dynamics are stronger, while mega-cap tech firms continue to invest in AI infrastructure.
- Weaknesses
- Some small-cap sectors may gradually benefit from AI capex normalization.
- Comparison
- Compared with small caps, large-caps have more resilient fundamentals and earnings growth that more consistently exceeds revenue growth.
- Risks
- If macro conditions improve materially, financing costs fall, or small-cap earnings accelerate in 2H26, small-caps could rebound on a relative basis.
- US Momentumpositive allocation
- Strengths
- The uptrend is earnings-backed, with NTM EPS growth year-to-date above 100%, valuation in a low 10-year percentile, and seasonality favorable from May to June.
- Weaknesses
- After consecutive gains, drawdown risk rises.
- Comparison
- In the Barclays framework, Momentum has the strongest earnings growth while valuation is not high, second only to Yield being cheapest.
- Risks
- Crowded positioning, profit-taking, or a slowdown in the AI theme could trigger a sharp reversal.
- US Qualitynegative allocation
- Strengths
- Traditionally has defensive characteristics.
- Weaknesses
- Current risk-on conditions weaken demand for defense, and sales and earnings-growth characteristics are relatively weak while valuations remain elevated.
- Comparison
- Compared with Growth and Momentum, Quality lacks the growth and trend exposure preferred by the current market.
- Risks
- If the market turns risk-off again, Quality may regain relative defensive value.
- US High-over-Low Volatilityneutral allocation
- Strengths
- It has rebounded strongly from its year-to-date low, benefiting from fading Iran-related energy-shock concerns, strong 1Q26 earnings and AI infrastructure spending.
- Weaknesses
- Forward P/E is around the 71st percentile over the past 10 years, so valuation is relatively tight.
- Comparison
- Earnings improvement means it is no longer purely a valuation expansion story, but sector exposure remains mixed.
- Risks
- Valuation crowding, a drag from Healthcare exposure, or shifts in risk appetite may cap upside.
- Europe Valuepositive allocation
- Strengths
- Strong earnings-season performance, with Europe EPS growth rising to about 7%, and structural negative correlation with Momentum make it a clearer rotation channel when leadership broadens.
- Weaknesses
- If AI-led Momentum continues to lead on one-way basis, Value may struggle to outperform.
- Comparison
- Compared with crowded Europe Momentum, Value is a more suitable asset for spillover benefits.
- Risks
- If earnings realization does not persist, peace progress changes energy and high-yield exposure, or the market remains concentrated in AI winners.
- Europe Momentumneutral allocation
- Strengths
- Leading performance in 2026 so far, with AI and earnings momentum still providing support.
- Weaknesses
- Trading is becoming increasingly crowded, and the report suggests managing rather than chasing increasing exposure.
- Comparison
- Compared with Value, Momentum is currently stronger but more crowded.
- Risks
- Spillover of leadership, de-risking of positions, or AI fatigue could create rotation pressure.
- Europe Low Volatilitynegative allocation
- Strengths
- Low volatility typically has defensive characteristics.
- Weaknesses
- Relative valuations remain unattractive, with poor selection outcomes in sticky inflation and higher-rate environments.
- Comparison
- Compared with Value and Momentum, Low Volatility lacks current appeal in Europe factor positioning.
- Risks
- If Europe turns significantly risk-off, low volatility could benefit on a relative basis.
Key data
- US Risk Asset Performance in AprilThe S&P 500 rose more than 9%, and Big Tech rose more than 16%The report says risk appetite fully returned in April, with Growth outperforming Value across both large and small caps.
- Big Tech Earnings SurpriseEPS surprise around +15.6%, EPS year-over-year growth around +35.8%This is stronger than the long-term median of +7.2% and is key evidence supporting Growth and Momentum.
- US One-month Long-Short Factor PerformanceHigh-over-Low Volatility +18.9%, Momentum +7.0%, Growth +5.1%, Value -6.7%, Yield -12.0%After the return of risk appetite, high-volatility, Momentum and Growth outperformed, while defensive and income-style exposures lagged.
- Small-cap and Large-cap Fundamental ComparisonSmall-cap 1Q26 earnings growth 14.2%, revenue growth 12.0%; large-cap earnings growth 17.6%, revenue growth 7.6%The report argues that large-cap operating leverage and margin dynamics are stronger, while small-caps remain constrained by higher leverage and financing costs.
- Momentum Valuation and EarningsNTM EPS growth year-to-date above 100%; forward P/E in the past 10 years about 30th percentileStrong earnings growth and still-not-expensive valuation are the core reasons for upgrading US Momentum to Positive.
- Europe Value Earnings SupportEurope EPS growth rose to around 7%, the highest since 1Q23The report views earnings season as a tailwind for Value, and if Momentum leadership spreads, Value is a clearer rotation beneficiary.
- US Rates and Policy Expectations10-year yield around 4.44%; Barclays economists expect only one rate cut by end-2027Fewer expected cuts weaken the attractiveness of Yield as a bond-replication-style strategy and continue to constrain small-cap financing conditions.
Impact & implications
For asset allocation, the report supports increasing US exposure to Growth, Momentum and large-cap versus small-cap, while reducing preference for Quality and defensive-style exposures; in Europe, it prefers participating in potential spillover through Value rather than continuing to chase crowded Momentum. If technology and AI earnings continue to beat, risk appetite may persist, but energy prices, geopolitical risks, the interest-rate path and crowded positioning still could drive medium-term volatility.
Risks
- Geopolitical and energy shock risks have not fully abated; lower oil-price and inventory buffers could become medium-term headwinds for risk assets.
- Barclays economists expect only one rate cut by end-2027, and higher rates may suppress valuation of growth assets, small-cap financing costs, and Yield-like bond proxy strategies.
- Momentum and AI-related trades in both the US and Europe could become crowded, and drawdowns could come quickly if earnings or flows weaken.
- Weak US consumer confidence may continue to weigh on Value exposures linked to consumer sectors.
- If peace progress further reduces conflict premium in Europe, it may mechanically pressure energy-sensitive high-yield exposures.
- Barclays and its affiliates may have business relationships with covered companies, and investors should treat this report as only one input in investment decisions.
What to watch
- Whether subsequent earnings revisions for US technology, AI and Big Tech continue to exceed expectations.
- Whether Momentum earnings growth continues to outpace price gains and whether crowding in positioning intensifies.
- Changes in US 10-year rates, inflation expectations and Fed cut expectations.
- Whether small-cap earnings improve as expected in 2H26 and whether financing costs ease.
- Whether Europe rotation spreads from Momentum to Value.
- Changes in energy prices, Iran-related conflict risk, peace progress and crude oil inventory buffers.
- Whether active managers and systematic funds such as CTA continue buying large-cap technology stocks.