Barclays has maintained a positive stance on Value stocks in European equities while shifting to a neutral view on Quality factors, arguing that reflation trends are likely to favour Value into 2026 even as Quality has cheapened back to average levels but lacks clear catalysts for renewed outperformance.
Stay informed beyond the headlines with premium market insight, AI stock picks and deep research tools from InvestingPro - 55% off today “Reflation still favours Value into 2026 and valuations aren’t stretched yet,” the analysts said. “Quality has cheapened back to average levels; near-term catalysts are limited, but earnings resilience warrants maintaining core exposure.”
Quality stocks suffered their worst relative performance against the STOXX 600 in two decades during 2025, driven by persistent investor rotation into value-oriented sectors.
The technical backdrop has also weakened, with the relative strength index shifting from a decade-long “buy-the-dip” regime to what Barclays described as a structural “sell-the-rally” phase.
Quality’s 12-month forward price-to-earnings ratio has de-rated to its long-term average, broadly aligning with return on equity levels. “This may look ‘cheap’, but Quality still trades near pre-Covid highs,” the analysts wrote. “In short, we think the derating reflects normalisation, not opportunity.”
Barclays said backward-looking screens that define the Quality factor, such as high return on equity and low leverage, are increasingly selecting companies exposed to macroeconomic headwinds.
Healthcare, luxury goods, consumer staples and chemicals have experienced earnings per share downgrades, while financials and industrials have led upgrades.
The bank reiterated its positive view on Value, supported by improving European economic data and historically wide valuation discounts.
European Value stocks trade around long-term average levels relative to the broader market at roughly 0.65x to 0.70x despite recent re-rating.
Economic momentum continues to support the positioning, with 82% of OECD countries showing rising momentum in their leading indicators.
The synchronised global recovery, Barclays said, undermines Quality’s traditional appeal as a low-beta defensive strategy.
“Quality thrives in stagnation, not in today’s synchronised global recovery,” the brokerage said, adding that economic surprises remain positive while cooling inflation signals a “Goldilocks” environment that favours cyclical assets.
In December 2025, Momentum and Growth led factor performance with strong gains amid higher dispersion. Value posted modest gains, while Low Volatility, Quality and Small Caps recorded losses.
Over the full year, Value finished as the top-performing factor in Barclays and MSCI long-only indices, slightly ahead of Momentum, while Quality ended the year with deep losses.
Although Quality experienced heavy outflows throughout 2025, positioning remains elevated among European hedge funds, suggesting further scope for unwinding as reflation dynamics persist, Barclays said.
Beyond Value, the bank maintained a positive view on Small Caps, citing decade-low valuation multiples, with 12-month forward price-to-earnings ratios near 1.15x to 1.25x relative to large caps.
Barclays upgraded Yield to neutral, highlighting improved income appeal in a higher-for-longer interest rate environment, while maintaining a negative view on Low Volatility strategies.
Seasonal patterns also support the cyclical tilt, with January historically favouring Value at average relative gains of 0.7%, while Quality typically lags with average losses of 0.2%, based on data since January 2001.
