Analysts at Barclays suggest that the recent uptrend in the pan-European STOXX 600 index might be losing momentum, partly due to a decline in volatility in both equity and bond markets across the region.

Since late 2023, optimism surrounding advancements in artificial intelligence and the potential easing of interest rates by the European Central Bank has propelled the STOXX 600 higher. Despite a retreat in April, the index is currently trading just below record highs.

However, in a client note issued on Friday, Barclays analysts expressed concerns that the rally in European stocks is showing signs of fatigue.

“Positioning and sentiment have rebounded, earnings season is over, seasonality is becoming more challenging, and we’ve seen some mixed data on both growth and inflation,” the analysts stated. “Amidst all these factors, both equity and bond volatility have continued to decline, reaching low levels, which may indicate a degree of complacency.”

They suggested that some consolidation in European equities would be both “logical and beneficial.” On Friday, European stocks traded lower, following weakness in Asian and U.S. markets as growing concerns about persistent U.S. inflation and high interest rates weighed on sentiment towards risk assets.

However, the Barclays analysts pointed out that the extent of the pullback in Europe might be limited by another quarter of strong earnings from AI leader Nvidia (NASDAQ:NVDA).

“Equity markets are still captivated by AI. Nvidia’s recent performance should help reassure investors that the excitement is warranted,” the analysts remarked.

They also noted that better-than-expected European manufacturing activity data in recent days could bolster corporate results in the second half of 2024 and provide support for more cyclical sectors such as mining and automotive.