Welcome to RBC’s Markets in Motion podcast, recorded September 23rd, 2025. I’m Lori Calvasina, Head of US Equity Strategy at RBC Capital Markets. Please listen to the end of this podcast for important disclaimers.
The big things you need to know: First, weakness in Homebuilders doesn’t bode well for the recent outperformance of Small Caps. Second, we’ve continued to see some slippage in earnings sentiment (the rate of upward EPS estimate revisions) for the S&P 500, which has been driven by companies outside of the biggest market cap names. Third, bulls picked up sharply in the AAII survey last week. Fourth, our work on US equity market performance in the 12-month period following non-recession-related Fed cuts and reset cuts highlights upside risk to our 2H26 S&P 500 target price of 7,100. Fifth, capex growth improved in 2Q25. Sixth, US equity funds flows bounced back last week, driven by US-domiciled funds.
If you’d like to hear more, here’s another six minutes.
- Starting with Takeaway #1: Weakness in Homebuilders doesn’t bode well for Small Caps. Through Friday the S&P 1500 Homebuilders sub-industry was down more than 7% from its early-September high. In recent years when we’ve gotten a lot of inbounds on Small Caps, we’ve also tended to get questions on Homebuilders and that’s been the case again over the past few weeks as well. This time around, we think it’s because both have been viewed as ways to play Fed cuts. With this in mind, we took a look at Russell 2000 performance relative to the S&P 500 and compared it to S&P 1500 Homebuilders performance relative to the S&P 1500 (both using a relative ratio). The two time series have mostly moved in sync with one another most of the time since early 2024, at least until recently. Interestingly, Homebuilding performance hit a high relative to the broader market in early September then began to underperform. But the RTY/SPX ratio has continued to move up as Small Caps have continued to outperform. Note that RBCCM’s Homebuilding analyst Mike Dahl, has maintained a cautious view on the Homebuilders. From our seat, our industry-level work suggests valuations for the Household Durables industry (which contains Homebuilders) lack appeal and earnings revisions have been weak.
- Moving on to Takeaway #2: the earnings chart that’s still bothering us. We continued to see some slight slippage in the rate of upward EPS estimate revisions for the S&P 500 in last week’s update. Digging in deeper, the slippage has been generated by deteriorating trends in the S&P 500 excluding the top 10 market cap names. The rate of upward EPS estimate revisions has continued to strengthen for the top 10 names, which helps explain the resurgence in leadership of those biggest market cap stocks and Growth stocks generally in recent trading. Overall, this divergence in earnings sentiment is a negative data point for the broadening leadership thesis.
- Next - Takeaway #3: Bulls bounce back. Net bulls on the weekly AAII survey improved in last week’s update. As of 9/18/25, the weekly data point for net bulls had moved back up to -0.7%, while the four-week average was back to -9.43%. For now, the four-week average is still in the -1 to -2 standard deviation range that has historically been followed by a +15% 12-month-forward return in the S&P 500, but the weekly data point is not. We’ve spoken at several group events for institutional investors over the past few weeks, in which one of our colleagues had asked those who expect stock prices to be higher by year-end to raise their hands. Most hands had gone up. While the AAII survey is of individual investors, its latest move also seems to capture the shifting mood of institutions.
- Moving on to Takeaway #4: Fear of fighting the Fed. This week, we’re highlighting a new chart that examines S&P 500 performance in the 12-month period before and after different kinds of Fed cuts. Stocks tend to move up in the 12-month period following cuts, unless the cuts occur during or before a recession. Reset cuts (those after a long pause within a cutting cycle) have a median 12-month-forward return of 13%, while non-recession cuts tend to have a median 12-month-forward return of 21%. The analysis highlights upside risk to our 7,100 2H26 S&P 500 price target.
- Next Takeaway #5: Checking in on capex. The time we spent at RBC’s Industrials conference last week, and the recent uptick in ISM new orders made us curious about how the latest capex stats are tracking for the S&P 500 and other indices. Capex growth moved up in 2Q25 for the S&P 500, the S&P 500 ex the top 10 market cap names, and the Russell 2000 and mid-cap indices as well. Inclusive of the top 10 names, S&P 500 capex growth is close to past highs, but excluding those names it is well below them. It remains to be seen whether the provisions in this year’s tax bill will spark a big wave of capex in the years ahead. The good news is that trends are already on the mend outside the top 10 S&P 500 names, and ISM new orders (which has been a good leading indicator of actual capex growth in recent years) has moved back into slightly positive territory. That being said, commentary on capex and the OBBB has been light in recent earnings calls, and survey data on capex plans has been mixed. We are also mindful that capex growth peaked early in 2018, another time when corporate uncertainty around tariffs was elevated.
- Wrapping up with Takeaway #6: US retail roars. We’ve been writing a lot in recent weeks about how flows to US equity funds have deteriorated in recent months. Last week, flows bounced back. Interestingly, passive retail flows to US equity funds, which had weakened a bit in recent weeks, also bounced back last week. Interestingly, flows stayed weak to non-US-domiciled US equity funds, while there was a sharp move up in flows to US-domiciled US equity funds. In other words, last week’s improvement in US equity funds flows appears to have been driven by US-based investors and retail investors in particular.
That’s all for now. Thanks for listening. Please reach out to your RBC representative with any questions.