RBC's Markets in Motion

Three big things you need to know: First, the Duke CFO survey highlights how C-Suite confidence has remained steady, with monetary policy and automation in focus. Second, our new valuation stress test suggests the S&P 500 has been baking in optimistic views on inflation, interest rates, and the Fed. Third, recent funds flow trends point to a lingering desire for a shift in market leadership.

RBC’s Markets in Motion is the weekly podcast from Lori Calvasina, Head of US Equity Strategy at RBC Capital Markets, highlighting her latest views on the US equity market. This week, we are excited to have Chris Louney, Commodity Strategist on RBC’s Global Commodity Strategy and MENA Research team, guest hosting this week’s episode while Lori is out.Three big things you need to know: First, while gold prices have had a strong rally this year, having hit record highs last month, we remain cautious. We think that gold is overvalued from the perspective of a number of key macro drivers and that there are some unrealized vulnerabilities to the pillars of gold’s rally. While we are cautious, it’s more because we do not think gold should be at such high levels just yet. Second, while May and June have seen a less weak and more rangebound trend for gold-backed ETPs, we are not convinced that investors are beginning to follow through just yet. Investors sold their gold holdings as prices rallied, and we’ve yet to see a sustained return to buying. Third, central bank demand has been a key pillar to the gold rally but as China’s pause in purchasing showed, there are vulnerabilities. To be clear, we still think that central bank demand will continue to be strong, but there are reasons to be cautious on the volume at record prices and after such a sustained period of strength.

Three big things you need to know: First, the continued outperformance of mega cap Growth stocks has been logical, but still somewhat jarring to us. Second, Small Caps broke to clear new lows relative to Large Caps last week as risks piled up including a Fed that seems inclined to cut just once this year. We’d stay on the sidelines with Small Caps for now. Third, investor sentiment continues to concern us, and we’ve added consumer sentiment to our list of worries for the stock market following the Michigan survey miss. One offset is that the US may benefit from safe-haven seeking if flows to European equity funds deteriorate.

Special Edition: This is a special edition of RBC’s Markets in Motion podcast, recorded on June 4th, 2024, from the RBC Capital Markets 2024 Global Energy, Power & Infrastructure Conference (EPIC). Lori is joined by two of her road warrior colleagues, Ben Fisher (Midwest Equity Sales, specializes in macro) and Amy Wu Silverman (RBC’s Equity Derivatives Strategist). The format this time is a bit different from the typical Markets in Motion podcast. Ben moderates a discussion with Lori and Amy about the big things you need to know from their recent conversations on the outlook for equities. Topics include stock market concentration and the potential catalysts for leadership rotation, the influence of retail trading, and views on the Energy and Utilities sectors.

Two big things you need to know: First, we highlight how and why old leadership in the US equity market has returned with a vengeance and run through our latest thoughts on what might get the rotation trade going again. Second, several of the gauges of investor sentiment and equity market risk that we track are keeping us neutral on stocks through year-end for now, and tactically cautious.

The big things you need to know: First, Small Caps are retesting their relative low vs. Large Caps once again, as Fed rate cut optimism has faded once again. We remain neutral Small vs. Large for now. Second, investor sentiment has almost returned to the highs in place to start the year (as well as the summer of 2023) on the AAII survey, reinforcing our neutral stance on the broader US equity market for now. Third, our S&P 500 valuation model continues to suggest that the broader US equity market is fairly valued, with some modest downside risk if current inflation, interest rate, and Fed assumptions end up being too rosy. For a material move higher in the market by year-end to be justified on the math, we think investors will need to start focusing on the outlook for 2025, where visibility still seems a bit limited.

The big things you need to know: Three big things you need to know: First, Tech has bounced back on performance and earnings revisions but valuations remain a problem. Second, valuations more broadly have started to look less appealing. Third, other updates in our high frequency indicators highlight how pendulums have swung on a few different fronts (namely investor sentiment, election stats, and funds flows).

The big things you need to know: First, reporting season has ended up looking just fine on the stats, with one twist at the end. Second, we update our rundown of key themes on earnings calls. Third, net bulls on the AAII survey bounced back last week as 10-year yields decoupled from their 2023 spike, hopes for Fed cuts returned, and flows to US equity funds improved.

The big things you need to know: Three big things you need to know: First, after a weak start to 1Q24 reporting season, it has settled into a groove on the stats. Second, we review our thoughts on key themes on company earnings calls so far. Third, we highlight what’s jumping out on our high frequency indicators. This includes our main sentiment indicator (which we still think hasn’t fallen enough) and our rundown of the key headwinds and tailwinds for Small Caps (which both weakened last week).

The big things you need to know: First, we’ve just completed our quarterly survey of RBC’s equity analysts around the globe and found that optimism on performance persists for most sectors and coverage regions, despite the challenges associated with higher interest rates. Second, with a fresh set of survey results in hand we are making three changes to our sector recommendations. Within the US (and S&P 500 specifically) we are upgrading Materials to overweight, downgrading Health Care to market weight, and downgrading REITs to underweight.

The big things you need to know: First, investor sentiment has taken a bit of a hit, but it’s too early to say the pullback is over. Second, while we continue to expect the pullback to bottom out in the 5-10% range vs. recent highs, we’ve taken a look at S&P 500 performance around recent wars to gauge potential downside risks if we are wrong in that assumption. Third, it’s been a rough start to 1Q reporting season as companies beating consensus EPS forecasts have been underperforming significantly in terms of immediate price performance. Fourth, we’ve been surprised to see Large Cap Growth underperforming given the recent move up in 10-year yields, and run through the reasons (besides crowding and overvaluation) that we think this is happening.

The big things you need to know: First, geopolitical concerns are spiking at a time when stocks already seemed due for a pullback. Second, the rotation trade has just gotten a lot more complicated. Third, companies have been keeping expectations low on earnings. Fourth, our valuation modeling suggests some modest downside risk to the stock market if we don’t get cuts, and a more significant hit if we get more hikes. Fifth, Small Caps may be stuck in a holding pattern for a while. Sixth, Biden has closed the gap with Trump in betting markets. Seventh, US equity flows have fizzled.

Two big things you need to know: First, the Energy sector still looks attractive to us, even after its big move in March, and we remain overweight. Second, Trump has lost some momentum in swing state polling, challenging a key assumption of many non-US investors.

Three big things you need to know today: First, we lift our YE 2024 S&P 500 price target to 5,300 (from 5,150). The most constructive model in our tool kit indicates upside to ~5,400, which represents our bull case if our base case is too conservative. Second, we continue to see some conflicting cross currents for stocks. Among the five models that we use, our economic, valuation, and cross-asset work are sending the most constructive signals, while our sentiment and politics work are less enthusiastic. Third, we lift our 2024 S&P 500 EPS forecast to $237 (from $234), which remains slightly below the bottom-up consensus.

Two big things you need to know today: First, our work on the R2000 relative to the S&P 600 (sparked by Small Cap PM concerns about low quality) adds to our belief that the US came close to recession in 2022. Second, CFTC buyside positioning in US equity futures rebounded last week ahead of the Fed, highlighting increased risk of a melt-up in the broader US equity market.

Three big things you need to know: First, Energy has been a top S&P 500 sector since January. We like its attractive valuations, improving funds flows, and role as an inflation hedge in our overweights. Second, Large Caps are starting to look a little better than Small Caps on a few of the earnings-related metrics that we track, suggesting to us that Small Caps’ sluggish performance of late isn’t all about Fed and inflation fears. Third, sentiment continued to slip on one of our main sentiment models from elevated levels.

Three big things you need to know: First, one of our key sentiment indicators has started to retreat after hitting extreme levels, which has coincided with a stealth rotation in leadership. Second, we’re starting to see a more broad-based improvement in US GDP expectations, which we see as supportive of continued rotation in stock market leadership. Third, Biden put out his wish list in Thursday’s State of the Union, giving equity investors a taste of his goals in a potential 2nd term.

RBC’s Markets in Motion is the weekly podcast from Lori Calvasina, Head of US Equity Strategy at RBC Capital Markets, highlighting her latest views on the US equity market. This week, we are excited to have Chris Louney, Commodity Strategist on RBC’s Global Commodity Strategy and MENA Research team, guest hosting this week’s episode while Lori is on vacation.Three big things you need to know: First, in our most recent analysis of global commodity investor flows, we have observed that total commodity investor AUM has started off the year on a weak note. Commodity-linked exchange traded products have continued to decline, led by gold, and commodity index AUM also weakened last month. This has set 2024 up for quite the balancing act, but we remain hopeful.Second, with gold playing such an outsized role in the weakness dominating commodity AUM, it may be surprising that gold prices have actually held up quite well. We have continued to call out gold’s price resilience, especially in the context of investors having remained on the sidelines. This compared to the gold-positive narrative of eventual rate cuts has left gold itself facing quite the balancing act.Third, a balancing act that has for the most part not played out in a commodity’s favor so far this year is US natural gas. It has touched lows recently amid weak weather-linked demand, buoyant supplies to date, and general bearish sentiment. We have described it as a commodity that has fallen a bit too far, seemingly waiting for a catalyst, but are recent headlines enough?

Three big things you need to know: First, 4Q23 reporting season stats are similar to what we’ve described over the past few weeks with fewer earnings beats than last quarter, muted stock price reactions following earnings prints, and further compression in the forecasted growth rate embedded in consensus earnings expectations for 2024. Second, in our review of last week’s S&P 500 earnings calls the tone was mixed on the macro, negative on China, and had a positive tilt on the consumer.Third, two of the charts in focus in our Europe/UK meetings last week included our chart showing how the earnings dominance of the top 7 names in the S&P 500 is fading (which may help spark leadership rotation down the road) and our chart showing how net bullishness on the AAII survey may be heading for a 2-standard deviation event (delaying the pullback we have been anticipating).

Three big things youneed to know: First, with reporting season almost halfway done, bottom-up consensus expectations for EPS growth in 2024 have shrunk to 9% from 11% – a combination of better-than-expected results for 2023 and a modest dampening of enthusiasm for 2024’s outlook. Second, a murky macro backdrop, elevated costs, and China challenges have been in focus in recent earnings calls along with a better monetary policy outlook. Third, in our high frequency indicators, things that caught our attention included the worsening in the sentiment backdrop for stocks last week and mostly positive data regarding the health of the economy and labor market.