Barclays’ Alexander Altmann Says High Real Rates Are ‘The Brakes’ On Equity Valuations, Warns Market Is ‘Not Out Of The Woods’

• Altmann said equities have become more expensive after adjusting valuations for the roughly 100-basis-point move in rates.
• He said delayed IPOs are pushing out a catalyst for the AI story, while products such as Muse have helped the trade near term.
• Barclays’ breadth data shows the divergence between index levels and the number of stocks rising is the worst in data going back to 2004.

Alexander Altmann, Barclays’ global head of equities tactical strategies, stated that higher real interest rates are acting as “the brakes” on equity valuations even as headline indexes remain close to their highs.

In an interview with Bloomberg, Altmann said the S&P 500 had done little since the end of May despite a “huge positive earnings revision.” At the same time, interest rates moved about 100 basis points higher, leaving equities more expensive once valuations are adjusted for those bond-market moves.

Bonds have become more attractive from a convexity perspective, with investors earning about 5.25% to hold them, he said. Altmann noted that if yields move to 6%, the loss would not be that large, while a move toward 4% would provide both the coupon and a price return.

AI Trade Still Needs New Catalysts

Asked whether investors were being tempted to move out of equities and sit at the front end of the bond market, Altmann said the answer differed by region. 

Some Asia-Pacific investors who had a strong year in memory stocks were dialing down risk to a degree, he said, while U.S. investors remained focused on forthcoming initial public offerings and chasing year-end performance.

According to him, the AI story hinges on a “continuous stream of positive narrative” because investors are still dealing with long-dated forwards and revenues that have yet to materialize.

With major IPOs being pushed further out, that story is also being pushed out. Investors therefore need to look elsewhere for a new AI narrative, he said, pointing to Muse and Instinct as having “saved the AI trade near term” and having helped propel it more recently.

Warning Signals Beneath The Index

Altmann told Bloomberg that market breadth has deteriorated sharply. Across the NYSE, Nasdaq and within the S&P 500, the divergence between spot indexes and breadth is the worst in Barclays’ data going back to 2004.

He also pointed to weaker banks, wider high-yield spreads and a rising number of S&P 500 stocks making 52-week lows. Barclays’ quantitative framework, which sent warning signals through the summer before switching off in early September, has now switched back on.

“It’s still telling us that we’re not out of the woods,” Altmann said. 

AI, Hyperscalers Are Not Immune To Higher Rates

Altmann argued that AI companies and hyperscalers are not entirely immune to higher interest rates, noting that 10-year real yields are as high as they were at the peak of the 2008 financial crisis. 

He also highlighted widening spreads on publicly traded data-center bonds, which have moved roughly 60 to 70 basis points over the equivalent Treasury around the 20-year point.

For Altmann, the question is whether the S&P 500 catches down to weaker breadth or breadth catches up — something he said will only be resolved once the direction of interest rates becomes clearer.

PCE Inflation Comes In Softer Than Expected

Altmann’s comments came ahead of the release of the Federal Reserve’s preferred inflation gauge, which showed both headline and core PCE inflation coming in below economists’ expectations.

Headline personal consumption expenditures (PCE) inflation rose 3.4% from a year earlier, below the 3.7% Dow Jones estimate cited by CNBC. On a monthly basis, the index increased 0.3%, versus expectations for a 0.4% rise.

Core PCE, which excludes food and energy, rose 3.0% year over year, also below the 3.3% estimate. 

Also Read: NetApp’s AI Opportunity Can Support Higher Growth, Says BofA — Raises Target After INSIGHT Event

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