End of Summer Update on our Sector Views - Transcript

Welcome to RBC’s Markets in Motion podcast recorded August 31st, 2022. 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 an update on our own sector views and the outlooks of US analyst team. Three big things you need to know:

  • First, in our latest RBC US equity analyst survey, taken in late August 2022, our analysts leaned modestly positive in their outlooks for performance over the next 6-12 months, and also had modestly positive views on valuations and demand. The most constructive outlooks were found in Energy, Financials, Health Care, and Tech and offset more pessimistic outlooks for Consumer Staples, Consumer Discretionary, Communication Services and Materials.
  • Second, our analysts don’t seem particularly alarmed about the buyback and corporate tax provisions in the Inflation Reduction Act, but our survey suggests the latter will be more relevant to the stock market.
  • Third, our analysts’ latest sector views support our own, ongoing US Equity Strategy overweights on Energy, Financials, Health Care, and Technology and our underweights on Consumer Staples and Communication Services. Given our concerns about another bout of volatility in stocks in the coming months and a potential pause in the Growth leadership trade, Health Care, Energy, and Financials are most intriguing to us at the moment, but we continue to like Tech as a longer-term rebound play.

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Takeaway #1: Our analysts have a constructive tilt heading into the Fall.

In our latest RBC US equity analyst survey, conducted in late August 2022, our analysts leaned modestly positive on the outlook for the performance of their industries over the next 6-12 months, and also had slightly favorable views on current valuations and the demand backdrop. Their views on margin pressures over the next few quarters were more evenly split. 

Digging down a bit deeper into the results, two things jumped out.

  • First, the rankings in terms of where our analysts’ optimism was highest and lowest didn’t change too much from our July survey. Energy, Health Care, Financials, and Technology remained the top four sectors in terms of the performance outlook as well as on valuations, demand, and margins. On the flip side, Consumer Staples, Communication Services, Consumer Discretionary, and Materials remained the sectors where our analysts’ pessimism runs deepest on the forward performance outlook.
  • Second, on balance, our analysts generally got a little bit more optimistic in their performance outlooks compared to our mid July survey. Performance outlooks for Communication Services, Consumer Discretionary, Consumer Staples, and Materials all got less negative (though not enough to pull them out of the pessimistic camp), while performance outlooks for Tech and Utilities got slightly more positive.
  • Meanwhile, our Energy team’s outlook for performance slipped a tiny bit relative to our July survey ….
  • This was driven by our E&P analyst moving from very bullish to bullish. Other Energy analysts’ views were unchanged and on balance the sector as a whole continues to get the highest forward performance ranking in our survey.

Moving on to Takeaway #2: In terms of hot topics, our analysts don’t seem particularly alarmed about the buyback and corporate minimum tax provisions in the Inflation Reduction Act.

  • As always, we asked a few special edition questions in this survey designed to tackle some hot topics. Some of these focused on the recently passed Inflation Reduction Act, and its buyback tax and corporate minimum tax provisions in particular.
  • More than two thirds (68%) said they don’t expect the buyback tax to have a material impact on their companies’ share buyback plans, while 25% said they didn’t know or that it was too soon to tell.
  • The responses on the corporate minimum tax were less lopsided. While our analysts’ don’t seem overly alarmed about it either, they do appear to view it as the more relevant of the two provisions for investors. 47% said they don’t think any of their companies will be impacted by the corporate minimum tax, while a third (34%) said some of their companies might be impacted but not most.

Wrapping up with Takeaway #3: Our analysts’ sector views support our own US Equity Strategy overweights on Energy, Health Care, Financials & Tech and Our underweights on Communication Svcs & Consumer Staples.

  • For context, we have concerns about another bout of volatility in stocks in the coming months and a potential pause in the Growth leadership trade. Nasdaq futures look over owned among asset managers in the CFTC data, earnings season and the midterms are lingering challenges for stocks, and Powell’s Jackson Hole speech provides investors concerned about valuations an excuse to take profits. Against this backdrop, Health Care – a classic defensive, along with Energy and Financials - key Value constituents - are most intriguing at the moment. But we continue to like Tech  - a core part of the Growth trade - as a longer-term rebound play.

Here are a few additional thoughts on each of our overweights:

  • We prefer to play defense in Health Care rather than Consumer Staples. Valuations are reasonable in Health Care, and still near peak in Staples. Our analysts are constructive on Health Care and cautious on Staples. And earnings sentiment has already gotten hit hard in Health Care, particularly Biotech.
  • Energy has strong EPS revisions trends, an appealing dividend yield, and strong endorsement from our Energy team.
  • Valuations also remain deeply compelling.
  • Even if the near-term ends up being challenging for Financials due to renewed recession fears post Jackson Hole, we like the sector’s historical tendency to outperform in recession rebounds. Valuations and the sector’s dividend yield are also deeply compelling.
  • ETF flows are also turning positive again for Financials…..
  • …and EPS revisions have been a bit more resilient than other sectors. That’s not too surprising, as EPS sensitivity to the stronger USD is lower for Financials than most other sectors.
  • Tech may get tripped up near term given it’s importance to the Growth trade. But the list of things we like about this sector remains long and we’re planning to ride out the storm here. Quality is high…
  • …valuations are reasonable, back to 2020 lows, and our analysts are constructive…
  • … our earnings revisions indicator is also close to historical lows. The move up in the 10 year is a big problem at the moment, but our rates Strategy team is still expecting the 10 year to end 2022 below 3%.

That’s all for now. Thanks for listening. And be sure to check out our sister podcast, RBC’s Industries in Motion, for thoughts on specific sectors from RBC’s team of industry analysts.