Investing.com -- Equity markets are regaining ground as optimism around trade negotiations outweighs mounting recession concerns, Barclays said in its latest equity market review.

The bank’s strategists led by Emmanuel Cau note that equities have “almost [returned] back to pre-liberation day levels” as expectations for deals involving major U.S. trading partners support risk sentiment.

“Trade deals hope trumps recession fear,” strategists wrote, pointing to the Trump administration’s pivot toward a more conciliatory stance.

The 90-day grace period and exemptions for Chinese tech firms have contributed to a calmer backdrop, fueling speculation that partial agreements with the European Union and China might emerge.

“Headlines this week [suggest] some sort of negotiations starting to take shape between U.S. and EU/China,” analysts added.

Still, Barclays warns that the recent rebound is fragile. The firm questions whether equities can sustainably break higher from here without a meaningful shift in policy.

“We find it hard to justify a market breakout above pre-liberation day levels absent a policy U-turn from the current stagflationary mix,” the report said.

Easing rhetoric from the Federal Reserve has boosted expectations for rate cuts, but Barclays sees a near-term pivot as unlikely.

Meanwhile, underlying economic data remains mixed. High-frequency indicators on trade volumes are deteriorating, and more corporates are signaling caution in forward guidance and capital spending.

“Hard data will have to follow soft data lower” eventually, strategists said, and if concrete trade progress stalls, companies could face pressure to cut back on investment and employment.

Earnings have held up for now, but the bank’s team highlights that “more companies are sounding cautious on the economic outlook,” with lower capital expenditure (capex) intentions becoming more common.

“So something has to give, as the many bears may prove too hopeful if a recession becomes unavoidable,” the strategists concluded.