Welcome to RBC’s Markets in Motion podcast, recorded January 29th, 2024. I’m Lori Calvasina, Head of US Equity Strategy at RBC Capital Markets. Three big things you need to know: First, we’d describe 4Q23 reporting season as a mixed bag so far. Second, in our transcript review we were struck by the wide range of views on the macro backdrop and outlook as well as the continued emphasis on the challenges associated with inflation and higher costs. Third, things that jumped out in our high frequency indicators last week included some modest improvements on some of our sentiment and valuation models. Plus, one bonus thought on the US Presidential Election.
If you’d like to hear more, here’s another 5 minutes.
Now, let’s jump into the details.
Let’s start with Takeway #1: It’s Been A Mixed Bag of Earnings So Far
With 24% of S&P 500 results in through Thursday’s close, along with 12% of the Russell 2000, we’ve taken a look at some early stats for 4Q23 reporting season. Three things jump out:
- First, the beat rates for the S&P 500 have been decent. So far, 75% of S&P 500 companies are beating consensus on EPS (a little worse than last quarter), while 68% are beating consensus on revenues (a little better than last quarter).
- Second, the reactions to EPS beats have been lackluster. Within the Russell 1000, the companies beating consensus EPS are essentially performing in line with the broader market over the course of the next trading day.
- Third, while bottom-up forecasts for S&P 500 EPS in 2023 have been stable, they’ve slipped for 2024. The bottom-up estimate for 2023 S&P 500 EPS is tracking at roughly $222 (up from roughly $221 to start the year). Meanwhile 2024’s bottom-up S&P 500 EPS forecast has slipped to $242.50 (down from roughly $245 to start the year). Despite the stability of 2023 EPS forecasts, 2023 margin forecasts for the broader index and a number of key sectors are tracking lower than they were at the start of the year. Revenue growth that’s tracking a little bit better than expectations at the start of the year has offset the weakness.
It’s still quite early in 4Q23 reporting season. But for the moment we feel like the broader US equity market is behaving a little better than we’d expect based on the results that have come in.
Moving on to Takeaway #2: What we’ve been reading in earnings calls transcripts
As has become our custom, our team has been reading through many of the transcripts of S&P 500 earnings calls to gain insight into what companies are saying that has relevance to the macro backdrop for the US equity market.
Key themes are still emerging. A few of main things that jump out to us so far:
- Collectively, Corporate America isn’t giving investors a consistent message on the macro backdrop and outlook. There’s been a wide range of views on how to characterize them, including “cautiously optimistic,” “moderately muted,” “muted,” “uncertain,” “optimistic,” “improving,” “similar to 2023,” “robust,” “strong,” “interesting,” and “complex.”
- Consumers continue to be described as resilient, healthy and strong for the most part.
- Discussions regarding inflation, costs, and labor/wages continued to emphasize them as challenges, but a few companies admittedly discussed how these headwinds were lessening.
- Geopolitics continued to be highlighted as a source of uncertainty.
Next, Takeaway #3: What Jumps Out From Our High Frequency Indicators
Two new things this week:
- On sentiment, net bulls in the weekly AAII survey continued to retreat last week, reducing a near-term pressure on the US equity market.
- Meanwhile, positioning still looks stretched on the institutional side per the weekly CFTC data. Overall, the sentiment backdrop has improved a bit, but we remain on guard for a near-term pullback.
- On valuation, a slightly better inflation outlook, following last week’s better-than-expected PCE release, has caused our valuation model to get a little bit more constructive. This model, which uses consensus PCE, GDP, Fed Funds, and 10-year yield forecasts to project a trailing P/E for the S&P 500 at YE 2024, is now anticipating a P/E of 23.55x at year-end, up from 23.2x in our previous updates. Using our below consensus EPS forecast of $234, that points to an S&P 500 year end level of around 5,500.
Wrapping up with a bonus thought on the 2024 election:
- Questions about the 2024 election and its impact on the US equity market have continued to trickle in with a focus on the prospect of a Trump victory. We stress that we still think it’s far too early to make big calls here. But for the sake of conversation, we’ve put together a table with our preliminary thoughts on potential equity market read-throughs from the Trump agenda as outlined on his campaign website. We highlight things we think the stock market may like, which are more stimulative in nature, and things it may not, which appear to be potentially inflationary in nature.
- We’ve also published our stats on how different R3000 industries performed around Trump’s 2016 victory and around the last 8 Presidential elections. Banks were counted among the groups that outperformed in both 2016 and around Presidential elections generally, while several Health Care groups were counted among the frequent underperformers.
- Though we’ve heard some non-US investors (who viewed a Republican sweep as likely) express reservations about owning Health Care stocks this year due to the election, it’s worth noting that our Biotech team believes Health Care policy will be more of a focus for Biden & the Democrats, and less of one for Trump & the Republicans.
That’s all for now. Thanks for listening. And be sure to reach out to your RBC representative with any questions.