Welcome to RBC’s Markets in Motion podcast, recorded November 11th, 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, earnings season is winding down with a disappointing feel to us on the stats, though it’s admittedly not driving price action right now. Second, in our transcript reading, a mixed macro and consumer remained in focus, as companies began to highlight key policy issues they are watching post election. Third, positioning in US equity futures, for both the S&P 500 and Russell 2000, looks stretched. Valuations have some room to run, but not a ton.
If you’d like to hear more, here’s another five minutes.
Starting with Takeaway #1: Earnings Season Is Winding Down With a Disappointing Feel to Us – Not That Anyone is Really Paying Attention
Here’s what jumps out to us on the stats:
- Within the S&P 500, the percent of companies beating consensus EPS forecasts (72%) is still a little below 2Q24 levels, though revenue beats are in line (61%).
- Within the Russell 1000, companies beating consensus EPS forecasts continue to show underperformance vs. the broader market in terms of their immediate stock price reaction. This remains a broad-based trend by sector.
- Earnings sentiment overall remains negative, with the four-week average of the rate of upward EPS estimate revisions in the S&P 500 (to current year and next year consensus forecasts) tracking at 46% (meaning slightly more downward than upward revisions. Trends remain similar within the Russell 2000.
Moving on to Takeaway #2: A Mixed Macro and Consumer Remained in Focus, as Companies Began to Highlight Key Policy Issues They Are Watching Post Election
- There were no major changes in themes discussed this past week beyond those we’ve been highlighting in our recent Pulse Discussions of the macro, outlook, and demand remained mixed as did discussions of the state of the consumer. The Fed, interest rates, inflation, and costs seemed less in focus than the past few weeks. Geographical discussions continued to highlight weakness in China, with some references to optimism around recent stimulus announcements. Companies continued to highlight AI successes and strategic considerations around these technologies but some examples of early wins remained underwhelming.
- The US election was in the middle of the week and it’s too early to detect a clear shift in tone or corporate behavior due to the event. Companies that reported after the election highlighted uncertainty over tariff policy, and optimism over less focus on drug prices and easing regulatory burdens. Others noted they were monitoring the House outcome, tax policy, and the M&A approval process.
Wrapping up with what else jumps out to us right now.
- Positioning/sentiment in US equities looks a bit stretched. US equity positioning in the futures market – including S&P 500 contracts – was at all-time highs on election day per CFTC’s Friday update.
- Russell 2000 futures positioning was also close to past peaks, which were achieved in 2016-2018 after a series of political-related trades into Small Caps on election optimism, tax reform, and the China trade war. Investors are asking whether Small Caps have more room to run, but this may not be the right question as they experienced several short-term outperformance trades during Trump’s 1st More frequent leadership shifts may be something investors need to get ready for in coming years.
- US equities also look a bit stretched from a valuation perspective. We’re keeping a close eye on the S&P 500 equal-weight forward P/E, which has moved up to 19x – well above average, but not quite back to past peaks. The same is true for the S&P 500 median P/E excluding the top 10 market cap names, which is at 18.7x.
- The Russell 2000 has also lost some of its valuation appeal after last week’s post-election surge. At 17.8x, the Russell 2000 market cap-weighted P/E is now within the range of peaks that were seen during the 1stTrump Presidency (18.9x in 2016, 19.7x in 2017, and 17.6x in 2018). We can’t quite say valuations have peaked on either index, but there’s far less room to expand going forward.
- Taking a step back from the data, it’s difficult to pinpoint what might spark a pullback in US equities in terms of narrative right now (a surprise comeback for Democrats in the House is one low probability tail risk we’re monitoring; geopolitics remains another). But we remain mindful that there’s not much capacity to absorb disappointing news. Election uncertainty has dissipated, and US equities are feeling optimistic over the direction of government policy though it’s fair to say that policy uncertainty remains and we continue to worry corporate tax plans might not provide the big boost to EPS markets expect). For now, the equity market seems to be in a discovery process regarding the new administration’s domestic economic policy in terms of what the priorities and contours will be. Overall, we’re getting ready for a more dynamic backdrop which requires more nimbleness in trading in the year ahead.
That’s all for now. Thanks for listening. And be sure to reach out to your RBC representative with any questions.