Have we just heard a warning shot from Barclays?

Today’s half-year results report has not moved the Barclays (LSE: BARC) share price much. It’s up about 2.5%. as I write.

I think there are sound reasons for the muted response from the market. If you strip from last year’s numbers the effects of litigation and conduct issues on profits, the underlying profit before tax actually plunged by just over 16% compared to the equivalent period last year.

Top-line income (revenue) also eased back by 1.3%. It seems to me that if Barclays underlying financial numbers were recovering before, they’ve slipped back again in the six-month period to 30 June. But the directors put a brave face on things and slapped 20% on the interim dividend anyway.

There may be trouble ahead

However, I reckon there was also a warning shot or two in the report’s commentary. The income environment in the first half was “challenging,” it said. And the company has hunkered down with the aim of reducing costs for the remainder of 2019.

Chief executive James E Staley explained in the report that progress building its mortgage and deposit balances had been gobbled up by “increased levels of customer refinancing and lower interest earnings from UK cards balances.” The outcome was that the overall reduction in net margin had only been “partially offset.”

So, as well as revenue and profits, the profit margin moved backwards in the period too. These are not the kind of figures I like to see from an enterprise that’s supposed to be in a state of recovery and moving towards growth.

And the stock market continues to keep the valuation pegged low. At the recent share price close to 158p, the forward-looking earnings multiple for 2020 sits at about 6.6 and the anticipated dividend yield runs above 5%. The price-to-book value runs below 0.5 too. Nearly every metric you look at screams ‘cheap’!

A rational response from the market

But I think the stock market has got it right with Barclays. Before it’s a recovery or a growth prospect, it’s overridingly a cyclical enterprise. Banks are among the most cyclical of all stocks you can buy, with the performance of their underlying businesses linked closely to the health of the macroeconomic environment.

Indeed, if the economy dives, I’d bet my last pound that Barclays’ share price will plunge too, along with profits and the dividend – despite the firm’s apparent cheapness. So, to me, it’s rational that the stock market is incrementally marking down the firm’s valuation as the profits in the underlying business rise. The stock market is doing its ‘thing’ and looking ahead. And with the cyclicals, little profits follow big profits – that’s why we call it a cycle.

Lloyds Banking Group referred to a deteriorating macroeconomic picture this week too. And well-known fund manager Neil Woodford expressed his view that the world economy is in a more fragile state than stock market valuations would suggest. I’m seeing traces of gathering economic storm clouds, so will continue to avoid shares in Barclays.