Investing.com -- European equity earnings estimates have yet to fully price in the impact of the Middle East conflict, according to Barclays, which warns that a sustained rise in oil prices could push earnings growth toward zero and weigh further on already-stretched valuations.
Earnings per share (EPS) consensus estimates for fiscal year 2026 (FY26) for Europe have held up at 13% year-on-year, though Barclays argues the headline figure flatters the underlying picture. Stripping out base effects in Autos, the growth is closer to 8-9%, the bank notes.
Barclays has cut its own forecast to 6%, based on oil settling at $85-90 per barrel, and warns that $100-plus oil would create a "non-linear impact on earnings," likely taking growth to low single digits at best.
The broker's economists have simultaneously cut Eurozone and U.K. GDP forecasts to 0.8% and 0.7% respectively, while the European Central Bank (ECB) is now expected to hike twice rather than hold, adding to "a less favourable growth-policy trade-off amid rising stagflation risk," they noted.
One mitigating factor, according to Barclays strategists, is that this is not 2022. While the oil price spike is of a similar magnitude to the post-Ukraine surge, gas and electricity prices have risen far less sharply, as Europe is considerably less exposed to Middle Eastern energy supply than it was to Russian supply.
Earnings base effects are also easier after three years of stagnation.
On valuation, Europe's price-to-earnings (P/E) multiple has de-rated 7% to 14.4x since the conflict began, still above the long-term median of 13.6x. Strategists say current levels roughly reflect mid-single-digit EPS downgrades, but that further de-rating is likely if the conflict drags on.
"Multiples could de-rate more in a persistent oil shock scenario, with SXXP potentially declining to ~550 levels, in our view, if oil settles around $100+/b, or even lower if recession risks were to increase," the team led by Emmanuel Cau wrote.
"At the same time, a quick de-escalation could provide some relief to valuations, and P/E multiples could bounce back closer to the previous highs," they added. The bank kept its base-case target at 620.
For sector positioning, Barclays frames the outlook as a binary war trade. A de-escalation favours Mining, Banks, Capital Goods and Discretionary, given their high GDP sensitivity.
If tensions persist, Staples and Pharma are best placed among defensive sectors. Since the conflict began, escalation winners have fallen 7.7% on average versus 9.3% for recovery-oriented names -- resilient, but nowhere near safe.
"Cyclicals' valuations are nowhere near depressed levels," the strategists said, "so still vulnerable in case of escalation."
On a country basis, Barclays favours U.K. equities. The FTSE 100's double-digit Energy weighting and limited domestic exposure make it more insulated, a dynamic that played out during the Ukraine war, when it outperformed other major European indices.