Welcome to RBC’s Markets in Motion podcast, recorded July 18th, 2023. I’m Lori Calvasina, head of US equity strategy at RBC Capital Markets. Please listen to the end of this podcast for important disclaimers.
Today in the podcast, three big things you need to know: First, late last week we lifted our 2023 and 2024 S&P 500 EPS forecasts to $219 and $227, respectively. Second, the rebound in consumer sentiment that’s underway explains a lot about the stock market this year – both have been recovering off recession-like conditions since last year. Third, some of the things that jump out from our high frequency indicators currently are that investor sentiment continues to creep towards overbought territory, and low quality factors have started to perk up within Large Cap. Both speak to the idea that the US equity market is in the midst of one big recovery trade this year.
If you’d like to hear more, here’s another five minutes. While you’re waiting, a quick reminder that you can subscribe to this podcast on Apple and Spotify. Now, let’s jump into the details.
Starting with Takeaway #1: Late last week we lifted our 2023 and 2024 S&P 500 EPS forecasts to $219 and $227, respectively.
- This was mostly a housekeeping exercise in which changes to the model were driven by the inclusion of 2Q23 actuals and shifts in macro assumptions for the variables in our model.
- Our revenue, margin and buyback assumptions are a little bit stronger than our last update, but our interest expense assumptions have worsened.
- We are now essentially in line with the bottom-up consensus for 2023 of $219 but are still below it for 2024 where consensus is at $243. Moderating CPI is a big drag on revenues in our 2024 number.
- Looking beyond our model, it’s worth noting that stock prices are already baking in a 2024 recovery in earnings growth, adding to our concern that the intermediate term outlook for the stock market has gotten a bit murkier.
- But our valuation model still points to some potential upside in the S&P 500 between now and year-end, making us reluctant to take a outright cautious stance. At the moment, the combination of our earnings and valuation models points to potential upside in the S&P 500 this year to the 4,700-4,800 range.
- In terms of positioning, we think 2Q23 reporting season presents a big test for stock market leadership. The Growth part of the market has seen far better earnings revisions trends than the Value part of the market. This has helped justify stock price leadership by Growth so far this year, but the gap between Growth and Value on the rate of upward revisions has hit historical peaks suggesting that earnings revisions momentum may be ready to shift back in Value’s favor. Where the relative strength in earnings trends lies during and coming out of 2Q23 reporting season is one of the key things we’re watching in the weeks ahead.
Moving on to Takeaway #2: the rebound in consumer sentiment that’s underway explains a lot about the stock market this year.
- Friday’s much better than expected consumer sentiment reading from the University of Michigan survey prompted us to revisit the relationship between consumer sentiment and stock market performance over time. The two have been loosely aligned, for both the S&P 500 and the Russell 2000, when we look at stock prices on a year-over-year basis. Interestingly, the correlation between stock market performance and consumer sentiment has tightened over the past few years, particularly for the Russell 2000. Recently stocks and consumer sentiment have been moving almost in lockstep.
- When we look at these charts, one thing in particular stands out which helps put the surprisingly strong move in stock prices in 2023 into perspective: consumer sentiment reached levels consistent with the lows of some past recessions last summer.
- We can add the fact that consumers felt as bad as they tend to feel in a recession last year in some respects to the list of things that make 2023’s stock market make sense. The S&P 500 was down 25% from peak at its October low, in line with the median recession drawdown since the 1930’s. Both consumer sentiment and stocks have been engaged in a recovery off recession-like conditions this year.
Wrapping up with Takeaway #3: some of the things that jump out from our high frequency indicators speak to the idea that the US equity market is in the midst of one big recovery trade this year.
- We took a break from tracking our high frequency indicators over the past few weeks due to the fourth of July holiday and to focus on other projects.
- Two things jumped out in particular when we returned to them late last week, both of which speak to the theme of recovery that we believe has been driving US equity markets this year.
- First, Investor sentiment continues to creep towards overbought territory, but isn’t there quite yet. Net bullishness among individual investors in the AAII survey is still hovering around 15% on a four-week average, still below the 30% threshold that often foreshadows problems for stocks.
- Net longs among asset managers for S&P 500 e minis tell a similar story.
- Second, low quality factors have started to perk up. Within the Russell 1000, a few of the quality factor baskets we track are starting to shift back slightly in favor of low quality again. Given that low quality factors tend to lead coming out of recessions, this adds to our conviction that stock market performance in 2023 is starting to feel like one big recovery trade.
That’s all for now. Thanks for listening. And be sure to reach out to your RBC representative with any questions.