The big things you need to know: First, despite the strong rebound in the US equity market investor sentiment remained subdued last week. This signals to us that there is room for US equities to run and climb a wall of worry. Second, 1Q26 reporting season got off to a strong start last week, evidenced by a sharp pickup in the percent of companies beating consensus EPS forecasts and reassuring commentary from companies. Third, other things that jump out in our latest updates include strong outperformance by Large Cap Growth and growth-oriented sectors in April, the low-quality burst of leadership within Small Cap, and strengthening inflows to the US amid outflows from Europe.
Digging in A Little More to Takeaway #1: Subdued Investor Sentiment
We saw this in terms of both on data and conversation. On the data side:
Net bulls on the weekly AAII equity investor survey were at -11.1% as of April 16th, down from the prior week and, on the four-week average, still at -13.5%.
Both the weekly data point and the four-week average also remained slightly more than one standard deviation below the long-term average. That's ultimately good news for the S&P 500, in our view, as levels of net bullishness between -1 and -2 standard deviations below average tend to be the sweet spot for S&P 500 returns on a 12-month-forward basis, with an average gain of 15%.
We're also keeping a close eye on forward P/E's for the S&P 500 and Russell 2000. Both are moving up but still have room to run before hitting past highs as long as the de-escalation/US economic & EPS resiliency thesis persists, an idea linked in part to the idea that the war's duration will be short.
“While we wouldn't describe these investors as bearish, they were clearly taken aback by the sharp rally in the major US indices and the quick move to new all-time highs.”
-Lori Calvasina, Head of U.S. Equity Strategy, RBC Capital Markets
On the conversation side
We spent several days last week in meetings with long-only US-focused and US-based equity investors outside of NYC. While we wouldn't describe these investors as bearish, they were clearly taken aback by the sharp rally in the major US indices and the quick move to new all-time highs.
The main concern generating this state of disbelief seemed to be that stocks were simply pricing in too much optimism, with potential ripple effects from the Middle East and energy market disruption still clouding the outlook in terms of potential cost pressures on businesses and consumers and demand/sentiment impacts.
We did not encounter concerns about Fed hikes or expectations of severe hits to US economic growth. While clients were interested in getting our take on private credit, we generally found that most did not see it as a systemic risk.
And while we didn't see evidence of euphoria regarding the AI theme, we also didn't sense anything resembling the AI anxiety that emerged last fall (bubble concerns) or to start the year (major job loss fears). On AI, there was more interest in discussing the capex cycle. Our take was that weak levels of spending by public companies outside of the top 10 market cap names highlight one way the cycle could be elongated.
Also surprisingly, the investors we spoke with were keen to talk about why US equities had been so resilient since the Iran war began. We highlighted our survey work from early March which illustrated how many sectors and industries were seen as having low exposure, and our work on US/non-US valuations which showed how the US had lost its valuation premium as the war began.
