Welcome to RBC’s Markets in Motion podcast, recorded May 13th, 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.
Three big things you need to know: First, reporting season has ended up looking just fine on the stats, with one twist at the end. Second, we update our rundown of key themes on earnings calls. Third, net bulls on the AAII survey bounced back last week as 10-year yields decoupled from their 2023 spike, hopes for Fed cuts returned, and flows to US equity funds improved.
If you’d like to hear more, here’s another 5 minutes. Now, let’s jump into the details.
Starting With Takeaway #1: Reporting Season Is Ending Up Fine on the Stats, with One Twist at the End
1Q24 reporting season is winding down, and the trends in most of the stats we’ve been highlighting over the past few weeks remain intact.
In both Large Cap and Small Cap, beats have been more abundant on EPS than revenues…
… and companies that beat consensus on earnings have outperformed the broader market in terms of immediate stock price reaction (something we weren’t seeing early on within Large Cap).
The bottom-up consensus EPS forecast for 2024 is tracking around $245, similar to levels in place last summer.
The one thing that’s changed in the stats we’ve been tracking is that we are no longer seeing new earnings leadership emerging on all of our stats. The percent of EPS revisions to the upside has been a little weaker in the top 10 names in the S&P 500 than the rest of the index throughout most of reporting season. But in our latest update the top 10 names are looking a little better on this stat again. This argues the recent rotation in the US equity market away from mega cap Growth and back to Value and cyclicals may be due for a bit of a rest.
Moving on to Takeaway #2: What We Learned From Earnings Calls
As our regular listeners are well aware, our team reads through as many earnings transcripts as we can to get a feel for key themes. Core themes didn’t change much last week. Some of the things that jumped out to us from our reading include:
- On outlooks, the macro backdrop, and demand, we continued to see both positive and negatives highlighted. On the positive side, companies noted more capital raises in biotech, healthy travel demand, less concern about an economic slowdown broadly, resilient consumers, easier 2nd-half comps, continued tech investment, ramping AI efforts, and reshoring. On the negative side, companies noted weak end markets broadly, cautious consumer spending, inflation and labor pressures, post-COVID normalization, pushback to pricing, the anticipation of higher interest rates for longer, and cautious corporate decision-making. We exit reporting season with the sense that the strength in fundamentals has softened a little. One thing we didn’t read much about last week (or the past few weeks) also stands out. Complaints about uncertainty in Fed policy haven’t been coming up much. This makes us think that recent messaging from the Fed, indicating further hikes are unlikely, may end up being a stabilizer for corporate confidence.
- On inflation and costs, we again sensed a more balanced discussion than what we found last reporting season when the hotter commentary, in retrospect, was signaling the greater-than-expected pressures from inflation that the government data releases would later confirm. This gives us some comfort heading into this week’s inflation reports. Some companies highlighted elevated costs but others noted lower input costs, progress on supply chains and labor, lower freight expense, more certainty about inflation’s path, and the benefits from cost savings.
- Consumer commentary continued to be mixed and have a bit more of a negative tilt than prior quarters. Weakness in the low end vs. resiliency at the high end remained a key theme, as did characterizations of the consumer as choiceful, price sensitive, and value conscious. Positives that continued to be highlighted included resiliency and healthy travel demand.
- On geography, we saw the same thing last week that we’ve seen throughout reporting season, which was that the tone around non-US markets, particularly China, seems more balanced and a touch better than what we’ve heard in prior reporting seasons. Some referred to China as “OK,” in a “good place,” or “steady.”
- Standout comments on AI discussion last week came from Utilities companies highlighting the boost to power demand.
- A number of investors referenced these comments in our meetings last week in discussions of why Utilities stocks have been outperforming recently. On this point it’s also worth noting Utilities flows have been improving.
Wrapping Up With Takeaway #3: What Else Jumps Out on Our High Frequency Indicators
We’ll do these quickly!
- 10-year yields are no longer following the path of their 2023 spike. This, plus the idea that the Fed won’t hike again and the return of cut hopes have helped US equities stabilize.
- AAII net bulls moved up to 17% last week. We continue to worry the recent retreat in frothy investor sentiment didn’t go far enough.
- The outflows seen from US equity funds recently may be ending. Blend, Growth, and Value flows with the US are all improving.
That’s all for now. Thanks for listening. And be sure to reach out to your RBC representative with any questions.