Welcome to RBC’s Markets in Motion podcast, recorded September 4th, 2024. I’m Lori Calvasina, Head of US Equity Strategy at RBC Capital Markets. Please listen to the end of this podcast for important disclaimers.
Two big things you need to know: First, as we return from the Labor Day holiday weekend in the US, we find that major challenges for US equities are still lurking. We remain confident in our 5,700 YE 2024 S&P 500 price target, but acknowledge the challenges that must be worked through. Second, other updates from our high frequency indicators keep us in the camp that believes the US economy is slowing but isn’t on the cusp of an outright downturn. Overall, we continue to take comfort in earnings and economic data.
If you’d like to hear more, here’s another five minutes.
Let’s start with Takeaway #1: Major Challenges for US Equities Are Still Lurking Post Labor Day
In mid August, we observed that the pullback and rotation in US equities to start the month released some of the pressures on the stock market, but didn’t fully solve its major problems. These included seasonality, sentiment, the US election, and anticipation of the Fed’s first cut. As the S&P 500 tumbled more than 2% on Tuesday, the first trading day post the Labor Day holiday, and as we were running through the latest updates to the high frequency indicators that we track each week, our commentary from mid-August was top of mind.
- On sentiment, AAII net bullishness is once again flirting with levels suggesting the stock market has gotten overbought again.
- Weak seasonal trends in the Fall have also been noted by many investors. It’s particularly striking to us that September has been a down month in each of the past 4 years.
- The US election remains a source of uncertainty. It’s also noteworthy to us that we’re entering a period when the stock market normally sees a bit of a pullback. In Presidential election years, we normally see a bit of a pullback that begins in early September.
- Investors are also nervously looking ahead to Friday’s jobs report and debating whether it will justify the Fed cutting by 50 bps or 25 bps. It’s worth remembering that US equities typically run up ahead of the first Fed cut, and also experiences a pullback that begins around when the first cut occurs. Debating whether the Fed has waited too late to cut is normal, and so is the turbulence that this angst creates in financial markets.
- The fifth problem that we’d formally add to this list is the underlying impulse in the equity market for leadership within the S&P 500 to broaden out away from mega cap Tech and AI names.
- After an attempt by Growth and Large Cap to reassert dominance earlier in the month, late August saw Small Caps and Value make their own attempts to take back leadership.
- While lingering concerns about the economy have made it difficult for the more cyclical parts of the US equity market to firmly take the reins, the problems with the mega cap Growth trade (slowing and less dominant EPS growth rates stretched positioning, and stretched valuations are far from solved.
Moving on to Takeaway #2: What Else Jumps Out on Our High Frequency Indicators
Overall, we continue to take comfort in earnings and economic data.
- Sell-side EPS estimate revisions are slightly positive for the S&P 500 over the past few weeks (55% have been higher over the past four weeks).
- Another solid data point from earnings is that the bottom-up EPS forecast for the S&P 500 has also moved up a little to more than $279.
- While most of the economic headlines on Tuesday focused on the weak and worse-than-expected ISM manufacturing print, which added to the economic angst in some corners of financial markets, we were surprised to see that 2024 real US GDP forecasts actually moved up a little in late August.
- Like much of the economic data we’ve been watching, late-August earnings commentary continued to paint a picture of an economy that is slowing, and reacting to pressure, but isn’t on the cusp of an outright downturn. General macro/outlook commentary has continued to emphasize both stable and healthy trends alongside the uncertainty associated with dynamic conditions. Negative impacts from higher interest rates were highlighted, along with optimism about the positive impacts of potential cuts.
- Consumer commentary was abundant in late August, but we didn’t learn anything new. Weakness in Asia, inflation and interest rate pressures in the US, the implications of a stuck housing market, and lower end weakness were highlighted by some, while others noted resilience, value consciousness, choicefulness, and willingness to spend.
- Heightened geopolitical tensions and election uncertainty were called out.
- AI discussions highlighted the early innings nature of the technology and headcount reductions made possible by its use. Though most recent AI headlines have emphasized the underwhelming nature of a certain semiconductor company’s results, we found one software company’s disappointment over “the huge amount of money that so many of their customers have wasted on AI” equally helpful to understanding why the AI theme has lost some of its sparkle.
That’s all for now. Thanks for listening. And be sure to reach out to your RBC representative with any questions.