Welcome to RBCs Markets in Motion podcast recorded March 5, 2025. I'm Lori Calvasina, Head of U.S. Equity Strategy at RBC Capital Markets. Please listen to the end of this podcast for important disclaimers. So today I'm excited to bring you a special edition of the podcast we're actually recording on site at the RBC Financial Institution Conference. I'm joined by Ben Fisher from our US equity sales team, who covers the Midwest, and he's also one of our macro specialists on the desk. Plus, we've got one of my closest partners at the firm, Amy Wu Silverman, our derivative strategist. With everything going on we thought it would be a good time to talk to you about the outlook for the US equity market, what we've been hearing from clients and what we're thinking Ben is going to take over the discussion, be our moderator, and I'll hand it over to him now.
Ben FisherAwesome. Thanks, Lori and Amy and thanks for having me again. I kind of wanted just to start with vibes, you were actually ahead of this, talking about how the vibes obviously started off the year, awesome and jovial, and obviously they've turned recently. However, when the vibes turn sour, the price action of the S&P and of equities didn't follow suit. That's obviously corrected as of late, as the equity drawdown has caught up to the to the vibe, so to speak. But you talk to a ton of investors, what are the overall vibes right now, and how do they play into equities?
Lori CalvasinaSure. I mean, it's a great starting point, Ben. And, you know, let's maybe just start with the investor vibes, right? And we've been talking about sort of these four, maybe five categories of vibes, but let's just stick with the main four, and the first one is the investor vibes. So, the primary way we've been looking at this is through data. And you see two very different things, whether you're looking at institutions or whether you're looking at retail. So, for the retail side, we look at AAII Net Bulls, the American Association of individual investors. That's a poll that comes out weekly. It's been around forever. Everybody watches it, and what we've seen is that net bullishness has plunged to levels. Whether you know you're looking at net bulls, bear levels, bull levels. We're starting to see things that we saw in 2022 when the market was at its worst, we are starting to see things that we saw back in the great financial crisis, the 1990 recession. You know, just overall, just crazy levels of extreme bearishness are showing up in this survey. And you know, it's unusual to get that without a drop in the market. So that's been something that's been puzzling us for a bit. And then when I flip over and look at the institutional side of things, we primarily look at CFTC data, and what we look at there is just a US, equity futures positioning. There are a whole bunch of different ways you can crunch this. Amy's desk does a great job of parsing this out and staying on top of it, and they're kind enough to share their data with us. But the, you know, the main way I can, I can sort of summarize it is that it doesn't really matter, if you look at dollar value as a percent of market cap, it doesn't matter what contract you're looking at. We've hit new highs, or we've returned to past highs on these metrics, and we're starting to slip. And we're probably, you know, in the second inning of seeing that slippage. And when that indicator falls, it can fall fast, whatever the opposite of parabolic is on the downside, like, that's what it tends to do. And as I kind of marry that up with conversations. I know Amy and I have been doing a lot together this year and comparing notes on the things we've been doing separately. And I'd be curious, you know, later on, to hear, sort of, you know, how her conversations have changed. But I will tell you my conversations changed last week when I was seeing mostly, you know, kind of long only investors, pension funds, a little bit of hedge fund conversation, but it was the first time, you know, I really heard people say, well, maybe there's not a Trump put in the market. Maybe, you know, he's really just focused on the bond market or going to let the equity market fall. Last week was the first time I heard US investors. I had heard this in Europe in December, but it you in the US, and frankly, throughout North America, last week was the first time I heard people say, ‘Maybe tariffs aren't just a negotiating tactic, like maybe this is something that's really going to happen in a long lasting way.’ So I think the investor vibes have been weak, and they are probably in the early stages of weakening on the institutional side. Now, if you think about the other four categories of vibes, you know, what we're seeing is sort of a range consumer vibes. We all know the story there, like from the Michigan and Conference Board surveys, those are weakening. And what I've really been impressing upon people is that I think it was the Conference Board survey. You saw it on both the consumer side and the CEO survey. Employment expectations are weakening, and that is something we have not seen in the last year. They're not terrible yet, but we are seeing, you know, an increase in those on the consumer side who say jobs are going to be difficult to find, and it's moved up pretty quick in a short period of time, if we kind of put the consumer vibes aside, you know, I would say the next category is those corporate vibes, and those have been much stronger. You know, if you look at the Conference Board CEO survey, it's much higher for what they captured in late January, early February, versus last fall. But I would tell you, even there, I think there's been some weakening, and we've noticed that in the earnings call transcripts, where uncertainty has started to eclipse optimism, as we've just sort of measured it week to week. The political vibes are the last category of vibes, and this is probably the most important one. You know, we all know it's tricky to talk about politics. It's there's a lot of emotion involved, so we do really try to stay focused on the data. And what we're seeing is that the S&P post-election has started to sync up with Trump's net approval rating, and it's the same way the market was syncing up with the polling data in early 2024 and 2023 and so when we started to see net approval move from being kind of slightly positive to slightly negative again, and there just been, you know, a tremendous, you know, increase on all these different political polling data is right, views on the net direction of the country just surged. But when we started to see some of that enthusiasm on the political poll’s kind of level out. And I would emphasize, it is still very strong relative to where it was in the fall, but that is also when the market stumbles. So, we do think politics, you know, is having an impact here. So bottom line, these vibes are all weakening. And I would say the corporate and political vibes have been more resilient than the consumer and the and certain parts of the investor vibes, but everything's turning in the same direction.
Ben FisherYeah, and I will say I just saw in the corporate vibes, from this conference, obviously, hearing from a lot of CEOS a lot of economically sensitive companies, it does seem kind of like a deer in the headlights. It's a lot of like, ‘Wait and see,’ type comments like, ‘Well, we're not changing numbers or anything, but we're, we're definitely on watch.’ So, it definitely seems to your point that the corporate vibes, while they've held up a little bit better, are starting to weaken. Maybe just sticking with the vibes theme for you Amy, like, what's the volatility landscape in terms of vibes? We've obviously gone through, like, the psychological 20 level on the VIX, but, you know, came into the year with virtually no hedging. So just like, where are we? What did the options market pricing in, in terms of the environment and, sentiment wise?
Amy Wu SilvermanSure, so first, I've probably butchered this analogy to death at this point. But up until now, have been describing this market as a paddling duck, and I just felt like it was very well suited, because you have this duck that looks calm and smooth on the surface, but a lot of these violent rotations, they're really underneath the surface. And to some degree, that's been the story for how index volatility has been suppressed the last few years. You know, I don't know the state of our duck, if we should tell it to rest in peace quite yet, but it definitely feels like the dispersion we've seen in the market is changing. You can really see, even on a year, on year basis, the level of the volatility landscape has really just gone higher. And what is interesting is, you know, for someone who doesn't drive, I really like driving analogies. We've been talking about this idea that there's going to be these volatility potholes ahead. So, what I would say is, yes, there's been a pickup in hedging. Yes, implied volatility has risen. Yes, you've seen headline VIX rise, and correlation levels lift from previous levels. But it's all been pretty orderly then, meaning, you know, you haven't seen kind of the Panic at the Disco that would characterize something like August 5 or February 2018 or the great financial crisis. But the way I would characterize that tail, that left tail, is it is getting a little bit bigger, this idea that we could hit a pothole in the near future is more likely, and that's related kind of to the structure of the market as we see it. So yes, there is hedging, but there is this idea that a lot of it has gone very short-term low tenor, which we've discussed before. And so, when you do get something cataclysmic, there might not necessarily be the warning signals that we are used to. So, you know, the vibes, I would say, to put a cap on it from options are nervous, but by no means the panic levels that we've seen during other crisis periods.
Ben FisherInteresting. And just going back to you Lori, I know at the beginning of the year you did your scenario analysis for markets for the S&P, at the time, everyone was focused on the upside scenario case, but that has quickly turned to the conversations of, ‘Okay, what's your downside case?’ So maybe just kind of walk through the bear case, like, what goes into that?
Lori CalvasinaYeah. So, you know, we can think about this tooth through a couple different lenses. I would say the first is just through our targeting process, right? So we've got the 6600 target on the S&P for the end of the year, which is, you know, like a 10 percentage type here, I forget the exact percentage certainly, you know, less robust than what we've seen in recent years. And we said when we put that target out, we did this right around Thanksgiving, that we assumed there would be a five to 10% draw down in there somewhere. We thought we were overdue for that, frankly, because at the time, I was sending a sell signal, we also had noticed valuations were sort of bumping up against ceilings and starting to retreat on just various things that we look at. And, you know, we said it was going to be a rocky path all along. You know, we have five different models that go into that. They ranged from 6200 to 6700 and frankly, the one we were having the most trouble with, the 6200ish number was coming from our valuation work. And it just didn't matter, you know, kind of what assumptions I put in there, if I put anything that was, you know, somewhat realistic, I really couldn't get above that number, right? And it's interesting to me that that's where the market topped out, you know, pretty recently, just a little bit below that. What we what we saw at the time, you know, we're sort of a couple of things that were worrying us. One was the potential for political headwind to take over two we were concerned about GDP forecasts. They were sort of right on the cusp between good territory and bad territory. We put, you know, the good assumption into the base case. We threw the bad assumption into the bear case. And then also, at the time, we were worried about 10 year treasury yields moving to 5% which would have caused some trouble, on our valuation work, less worried about that 5% scenario on the 10-year now, right? The Treasury is making a concerted effort to message to the investment community. They're trying to keep yields down. So let's take that one off the table. The two things that sort of went into that bear case and the bear case number, by the way, was 5775 basically, kind of around the average of the different scenarios we were looking at. We modeled in 2018 to that bear case, which was when we had a similar setup on positioning on the CFTC data. We also had a trade war. We had the low ball unwind, so you could tell there was some nervousness in markets. And then we had some Fed problems with just concern about the pace of cut our hikes rather and their impact the balance sheet unwind. We had a 20% draw down that year. If you think about it from the GDP perspective, we're sitting at 2.3% consensus forecast right now for 2025. Two to three is a very good range for stocks. But guess what? One to two is a very bad range, and so when we see these consumer vibes weakening, I'm not really worried about recession, but I am worried about that two three turning into a one eight or a one nine or a one. And a half, and historically, markets, stocks, at least, just don't deal well in that environment. Now, putting all that you know, kind of targeting math aside, the other way you can sort of get at potential downside in the markets is by looking at what I call the four tiers of fear. And this is a framework, you know, I've sort of had unofficially for a long time, but I found over the last week, when we're getting, you know, is there a Trump put, what kind of situation are we dealing with? How bad, you know, could a pullback be? I kept going back to that, and so I decided in our latest weekly just to write it all out and kind of pull it all together, all these things I've been talking about over the years. And your four tiers of fear, tier one, five to 10% draw down. That's what we're in the middle of right now as we speak. That has been overdue. I think that around the 10% mark, sort of 5500 is the battleground. The thing that's a little worrisome to me right now is when you when you go past 10, there's not a lot of distance between that and what I call a growth scare. And when you hit 10 and you break it, and you don't stop there, what we've seen in recent history, at least in my career, is you tend to go to 14 to 20% draw downs. And so that's tier two of fear, what I call the growth scares. We saw those in 2010 2011 2015 16, 2018 I already explained 2018, that 1516, was the industrial recession, and 10 and 11 were the European debt crisis and the debt downgrade, right? And those were fears of recession or systemic, wide problems, you know, a collapse in the system. Essentially, that didn't materialize. I am worried that we are headed for one of those. If we get into one of those, it is going to push us into my bear case. I don't think we're there yet. It is not, you know, taken over the probabilities. I think we still have the opportunity to keep this market on a good but rocky path. But the risks of that, tier two of fear are increasing, tier three and four. I mean, just for completeness, tier three is a recession or War. It's worth a quarter to 30ish, you know, 33 type percent in the market. I don't think we're headed to that. I do think we have strong bones in the economy, and tier four is a crisis, right? You more or less lose 50% of the market value. Think GFC or tech bubble implosion. I'm not looking for that either, just to be clear. But you know, we have been laying out that framework for people lately.
Ben FisherThank you. How do you see, this current environment versus like 2018 differences, similarities, just in terms of that kind of peak fear levels. Do you think that's in the cards?
Amy Wu SilvermanSo, you know, someone asked me today, actually, they kind of said, you know, your tone feels different. Amy, like, what's changed? Like, what does this remind you of? And I actually that that was my answer. I said, you know, in some ways, it echoes the 2017 to 2018 complex. So if you just rewind to 2017 that was an incredibly low realized volatility year, probably the lowest we had on record over the past decade. And then, you know, that led into the collapse of the levered inverse VIX ETP, so SVIX. And of course, that that kind of volmageddon event was very unique, and I don't anticipate that happening again. But then that also led to the later part of the year into this trade war situation. As Lori mentioned, 20% drawdown. I think the ban on the VIX went up to 50, right? So yes, we've surpassed the psychological 20 barrier. But is there room to grow? Certainly, if you get into that scenario. Here's what I would say. I like to look at two indices. One is SDEX, and the other is TDEX, which I've now forced both of you to become very familiar with. But the simple idea is, SDEX just says, ‘Look, let's say we have a one standard deviation drawdown in the market, right on a rolling basis. How much does that cost you to protect against that drawdown?’ And then TDEX is a three standard deviation drawdown on the market on a rolling basis. How much does it cost to protect that? So one would be, as Lori calls it, your kind of garden variety, five to 10% drawdown, and the other one is more that growth scare scenario, right? That's why I like them. Is one is giving you one threshold of bearishness, and the other one's giving you, like a little bit of a different flavor, like this is way more serious. When I look at those on a year to day basis, those are in their 99th percentile, which kind of makes sense, because we just came into the end of December with such exuberance that, you know that makes sense. But you take that back five years, 10 years, we're still like in the 50th percentile bin. So in terms of sentiment we have, we have a lot more to go if those fears start to cycle on themselves. And the other thing I would say about getting to that scary threshold, so the idea of a growth scare is there's other kind of structural things that will go along with it. So when you think about kind of baby with the bathwater situations, there are going to be unwinds that happen in a lot of trades that have done very well these past few years, that start to really implode when we're talking about more than 10% down. And so it's not just a function of now the market is in a growth scare. It's actually a function of these trades are unsustainable, and then that can cycle in itself, the way we saw on August 5, right? So, again, I call that a pothole. You can call it whatever you want, but it's this idea that all these trades that essentially bet on very, very low dispersion or correlation never moving from these levels. You know, they're gonna break at some point. And that is a concern that kind of, typically is very correlated to the idea of these more severe drawdowns happening. Now, again, it's been very orderly. Again, we're still only in the 50th percentile when you look at SDEX and TDEX, but we're starting to see really interesting trades in the market. So, people buying VIX 50 strike calls, right? Like, pretty large size, essentially saying they're worried about these very low delta, on scenarios coming to fruition, and they at least want to sit on that tail risk in case something does happen.
Ben FisherAnd it's a good segue to speaking of trades. The other huge theme of the market this year or in the recent drawdown, has been the momentum factor. You've done a lot of work around the right tail momentum factor, where we had this inverted skew, and it kind of caused a force like FOMO buying of the momentum factor AI stock. So, obviously that's taken a hit with the recent draw down and momentum factor. But where are we now in terms of, have we capitulated enough? Or what's the options marking telling us about that specifically?
Amy Wu SilvermanSo momentum factor, when you just really simply define it, is this idea of ‘winners win.’ So as you said, that right tail is we had too much benchmark, FOMO, right?
Ben FisherSo basically, euphoria has come out, but they haven't gone out right bearish yet and not hedging for that. You know, one thing that is interesting is, and another question I get a lot, is any signs of, capitulation out there. I know you mentioned AAI, and it's a sentiment indicator that you love and that you've leaned on, and it's been a great, you know, great guidepost for you. Specifically, when it gets to two standard deviations below normal. That's historically been a, not to put words in your mouth, but almost like a “close your eyes and just buy.” I know we've gotten pretty close to that. Where are you in terms of that kind of capitulation, AI versus equities.
Lori CalvasinaYeah, look, I think if you were looking at AAI on its own, it's, it's maybe not technically a, hold your nose and buy because, again, those deep levels of net bearishness can get stuck there for a while. That's what we've seen at the major crisis, and it's only, you know, finally gotten there for the first time last week, right? But I think it's fair to say it's close, right? And you do a back test, that's you're basically the sweet spot, right? For buying equities. You do have to kind of let things play out, though. And so I would say, you know, the other things that would be on my list would be the CFTC indicator I want to see, you know, that come down much, much more than it already has. You know, we have been looking at the small cap space, and I'm an old small cap strategist, as you know, kind of my regular listeners, know. And you can always look at small cap PEs, to give you some perspective in the middle of things getting messy, and where we are on that. PE, right now we do a market cap weighted PE, we kick out negative earners. So it's kind of like a scrubbed small cap, kind of the investable universe for the small cap PM, and that is at 15.05 as of the last time we measured it, late last week, your average is about 15.2 so we've broken a teeny tiny bit below average. If you go back and look from 2015 to 2019 that was the bottom on the multiple. Now I haven't gone to see if that was the actual bottom in the market, but that is where small caps kind of cried uncle and said, This is enough, and that's an. Interesting reference set, because we did see late last year the small cap PE that same measure went back up to the ceiling of the 2016 through 2019 time period, right? So that was the ceiling it hit. This would be a natural place for it to bottom out. But if you do kind of go back farther, you can see, and I think even in 2022 you can get, you know, sort of down into the 1113, times range. And so that range often is what we will describe as hold your nose and buy in small cap when you do that, because you're essentially pricing in a recession. Yep. And you know, if I kind of put that aside as well an old favorite of mine, and I don't think it's in play right now, we'll see. You know, if things do sort of go into that growth scare territory, this one might come back into play. But if you look at the rate of upward revisions on the S&P 500, so are we taking earnings estimates, you know, up or down, not by how much, but just the volume, right? It's kind of the people will call this often earnings breadth. I tend to call it earnings sentiment, but the rate of upward revisions for the S&P 500 has softened, but it's only at about 40% what you typically want to do. And I sort of started really focusing on this one in the financial crisis back when I was a small cap strategist. But you see similar trends in the Russell you want to look for less bad revisions, but you need to get to trough revisions. And trough revisions are going to be, you know, 20% right, and they tend to top out around 80, right? So, you never get to zero or 100 because there's always some company that does something weird, but you when you go from like that 20 to 30, so you're mostly negative, but you're getting less negative. Those are amazing opportunities, because everybody is super bearish and everybody is super fearful, and numbers are going down, but you can see it. On the rate of change, right? Like, things getting just a little bit less bad. On the earnings front, that one's not in play, though, because it hasn't really, you know, collapsed right now.
Ben FisherAnd thanks. It's very helpful. And similar question for you. Amy, like, what are you looking for in terms of signs of capitulation?
Amy Wu SilvermanSo, for capitulation again, whatever that volatility pothole is, we're not close to those bands. So implied correlation levels right now are like mid 20s, 30. We've seen it hit 80, right? VIX? Yes, we're again, we cross that psychological 20 threshold. We've also seen VIX hit 80. So those are definitely signs of capitulation. But again, you don't hit those unless you get a volmageddon or a GFC situation. We're not, we're not there yet. Those are signs of capitulation. As it relates to retail. You know, to some degree, no, retail isn't hitting that FOMO bit anymore, but they also haven't really left, and I do think that's interesting. So, you're not seeing, for instance, you know, retail, at this point knows how to trade options. They I think they do it all day long on Robin Hood, but it's not like you're seeing the opposite of the inverted skew happening on their beloved names, right? Yes, we've gotten over the exuberance, but we haven't actually left and gone completely into bear territory. And then maybe, thirdly, I'll give you one sliver optimism that I think is interesting, which is just about, you know, this ever-present breadth issue of the market, right? This idea that how the meat is made in the market really matters. And it's just even if you look at yesterday's trade action, when there's a flight to safety, where does it go back to? It tends to go back to mag seven, right? So, to me, that's very interesting, because that becomes the same concentration issue. If mag seven ends up being okay, the market's going to be okay. Once every quarter I run our Sharpe ratio study, which, to me, is just a good level set for me of saying, here's like consensus research analyst expectations for return, right? We know what our cash yield is. Let's, let's take that sharp ratio against kind of 12-month implied volatility and get it and basically say, Are these sharps moving up down? What's happening? So, I just recently reran this again, and I have to tell you, for the last two years, all the sharps, although they are positive, have been declining, which kind of makes sense, if you believe in a market that is like slowly inching towards price target. And basically, people just don't think there's that much, like return left now, at that point in time, like, let's say, a year ago, the level set of volatility wasn't as high, right? So, you're Sharps don't look that bad, because the actual level of risk adjusted return is okay. Now that risk adjusted return is getting weaker because your levels of volatility are increasing. But what's interesting is we actually saw some increases in some sectors, specifically tech, which means those consensus returns are actually rising too to counteract what we're seeing volatility. To me, that's very interesting. And if that holds true, again, it's about how the meat is made, and positively, that would be good for the market.
Ben FisherSo, YOLO is not dead.
Amy Wu SilvermanNot dead yet.
Lori CalvasinaCan I just add one more thing and this is not sort of like a classic, kind of bottom capitulation signal, but I think it's very relevant today. Is we've seen a sentiment shock start right, and I still think that's got some ways to go. But what we don't have a clear understanding yet is whether or not it's hitting the hard data. And, you know, I think, you know, we're sitting here at the Financials Conference. It's conference season starting right? Earnings are winding down. Conference season is starting up before the next reporting season. I do think the next few weeks are going to be pivotal as companies come to events like these and say what they're seeing on the ground. And you know, if there are any sort of sell side analysts who cover companies listening out there, I would just ask a favor, which is, push these companies hard in Q&A, because I do think we just went through a reporting season where the commentary on current conditions was very light. We read through a lot of earnings call transcripts on my team, and we usually get a lot of color on the cadence of demand, especially in year ahead outlook season, and we're just not getting it this time. I think it speaks to the uncertainty. You know, kind of your deer in the headlights comment, Ben. Like, I just don't think we're getting the color that we normally get, and I do think it's important to get those boots on the ground feel in the next few weeks.
Ben FisherSure. Well, great. and until the next podcast. Thank you both.
Lori CalvasinaThank you for Moderating.
Amy Wu SilvermanThank you.