Welcome to RBC’s Markets in Motion podcast, recorded April 8th, 2021. I’m Lori Calvasina, Head of US Equity Strategy at RBC Capital Markets. Please listen to the end of this podcast for important disclaimers.
This week in the podcast, we run through the results of our latest US equity investor survey, which wrapped up last week. The big thing you need to know: The mood of the market is slightly less optimistic than our December survey.
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Now, the details.
Starting out with the overall equity market outlook.
- The investors in our latest survey still skew optimistic on the overall direction of US equities.
- However, those that say they are bullish or very bullish on stocks on a 6-12 month view actually declined since our last survey – 50% in March, vs. 60% in December.
Moving on to what’s keeping investors optimistic.
- Slightly better valuation assessments and improved outlooks for EPS and the US economy are a big part of the reason why.
- On valuation – it’s still a concern, but we saw a slight improvement for 2nd survey in a row – 54% said valuations are expensive or very expensive, down from 60% in September.
- On earnings, the median buy-side forecast for 2021 S&P 500 EPS rose to $175 up from $170 in December. For 2022, the median forecast rose to $187 from 180.
- On the economy, 94% said they are bullish or very bullish over the next 6-12 months, up from 73% in December. That’s the highest since we started asking this question in 1Q18 – essentially all of the recovery’s doubters have been converted.
- Margin outlooks also remained constructive and didn’t change much, with 72% anticipating expansion over the next 6-12 months.
- In a new question, we found a similar degree of enthusiasm for the cash deployment outlook, with 66% putting themselves in the bullish or very bullish camp.
- One thing that jumped out is how our survey participants expects companies to deploy their capital. Our survey respondents are generally optimistic on share buybacks – not much of a surprise. What did surprise us was that many are also very optimistic about M&A picking up.
Wrapping up with why we think investors reined in their enthusiasm a bit. Our survey pointed to six reasons:
- First, a ramping down of expectations for when business/daily life will get back to normal -
- Those who say normality will return in 2022 moved up to 39% from 35% in December, and those who expect normality to return in 4Q21 inched up to 27% from 23%. Meanwhile, those saying 3Q21 fell to 18% from 32%.
- We were surprised to see this given the improving pace of vaccines, but recent investor conversations suggest investors are starting to worry about vaccine hesitancy in the general population.
- Second, concerns about the new COVID variants –
- Investors are split on the outlook here – 39% are somewhat or very worried, while 39% are somewhat or very optimistic.
- Third, shifting views on the US Dollar –
- The Dollar bear camp is still the plurality, but those expecting Dollar weakness fell sharply from 69% to 41%. Meanwhile, the strengthening camp rose from 8% to 18%.
- As a reminder, in last week’s podcast we highlighted how a stronger Dollar is typically a negative for performance, earnings revisions, and margins. But we don’t think the impact will be felt until the second half when the Dollar strengthens year over year.
- Fourth, inflation worries –
- 80% expect acceleration, but investors are split on the stock market impact. 42% say the market impact will be negative or very negative vs. 30% who say positive or very positive
- Fifth, a more negative assessment of the fiscal policy backdrop
- 53% say the policy backdrop over the next four years under the Biden Administration is negative or very negative, up from just 21% in December
- Tax was a major focus, with 93% saying it’s likely or very likely Biden will get something significant done on corporate taxes, along with 75% who expect significant action on individual taxes, and 59% who expect significant action on capital gains taxes.
- Tax worries offset any good vibes from infrastructure, where 84% say likely something significant will get done.
- Sixth, monetary policy –
- Expectations are that 2022 will be a pivotal year for monetary policy
- 63% expect tapering to start in 2022, and 49% say Fed rate hikes will start in 2022
It’s worth noting that we’d put these six concerns into two different tiers. The top tier, where worries are highest, are the Fed, fiscal policy, and inflation, in that order -- these are the three issues that our investors are keeping them up at night about the market.
That’s all for now. Thanks for listening. Please reach out to your RBC representative with any questions.