Welcome to RBC’s Markets in Motion podcast recorded October 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, we reflect on hot topics and some of the most interesting things we saw and heard last week. Three big things you need to know: First, we revisited the international revenue exposure of the major US indices and sectors. The data suggests to us that as long as the stronger US Dollar is a problem for US companies, that Small Caps and Large Cap Value are the best places to be. Second, with more than half of S&P 500 results in, the softening in the EPS-related stats that we track has become more significant, though we still think there’s another round of clean-up to forecasts that will need to happen in early 2023. Third, sentiment on the growth trade and the new economy has been deeply pessimistic, but it’s been even worse in Small Caps and the old economy.
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Now, the details.
Takeaway #1: As Long As The Stronger US Dollar Is A Problem, Small Caps & Large Cap Value Are The Best Places To Be Within US Equities
- We’ve been reading a lot about the hits companies have taken to 3Q earnings from a stronger US Dollar over the past few weeks as we’ve dug through earnings call transcripts. For many years, going global has been a growth strategy for many companies across many industries.
- Our charts of the week remind us which parts of the US equity market the stronger US Dollar poses the greatest challenge to from a revenue perspective. In these, we calculate (with the help of the RBC Elements team) the percent of revenues from international markets for Large Cap, Small Cap, the major sectors, as well as the Growth and Value indices, based on 2021 data.
- In terms of size, we estimate that 21% of Russell 2000 revenues are international, compared to 30% for the S&P 500.
- At the sector level, we estimate that Technology and Materials have the most international exposure in both Small Cap and Large Cap. Communication Services, Energy, and Industrials are also high relative to other sectors in the S&P 500.
- Looking at EMEA exposure specifically, we estimate that it’s highest among the S&P 500 sectors for Communication Services and Materials.
- Interestingly, Large Cap Growth has significantly more international revenue exposure than Large Cap Value (33% vs. 27%).
- But within Small Cap, Growth and Value have similar international revenue exposures.
Takeaway #2: Softening In The Earnings Backdrop Has Become More Significant
- Last week, we observed that clear signs of softening could be seen in the EPS-related stats that we track, though the sharp cuts that many investors have clamored for remain elusive with many companies declining to comment on 2023 until next year.
- With more than half of S&P 500 results in, that generally remains our take, though the softening did become more pronounced in most of the data sets we’re watching.
- Here’s a rundown on what jumps out to us at the moment on the stats:
- 72% of companies are beating consensus on EPS for the S&P 500, a stat that continues to trend below the levels seen in recent quarters.
- The bottom-up 2023 consensus EPS forecast for the S&P 500 has fallen to $234 – still well above our own forecast of $208 but down from $241 at the beginning of September.
- The rate of upward revisions to FY1 and FY2 EPS forecasts has fallen to 33% for the S&P 500 broadly.
- More importantly, the pockets of resiliency that we had been seeing on this metric have mostly evaporated as the only sector still in positive EPS revision territory currently is Utilities.
- For 3Q22, the implied EPS growth rate has inched up as revenue growth expectations have moved up a bit….
- but margin expectations have come down significantly.
- The tone around demand has become a bit more mixed based on the transcripts from last week that we’ve read…
- and with more TIMT results in, discussion about pauses in hiring are more in focus in the labor discussion.
- We’ve also noticed a few companies talking about getting more cautious on capex and/or buybacks, along with the need to pay down debt.
- Even though we see signs of a more significant softening in the broader stats, it’s worth noting that beats are still being rewarded, particularly in Energy, and that misses are being punished most severely in a handful of sectors, specifically Communication Services, Tech, Materials.
Wrapping up with takeaway #3: Sentiment On The Growth Trade And The New Economy Has Been Deeply Pessimistic, But It’s Been Even Worse In Small Caps And The Old Economy
- We’ll wrap up this week’s Pulse with some quick thoughts on sentiment/positioning. We get the best read on institutional investor sentiment/positioning in the weekly CFTC data, specifically in asset manager positioning in US equity futures contracts.
- The latest data – released Friday and captured as of last Tuesday – highlights how positioning in Nasdaq futures contracts among asset manager has been close to historical lows, which helps to explain Friday’s fierce snapback in the TIMT trade.
- But positioning has been even worse in Russell 2000 and Dow futures contracts in recent months, as positioning on this data set troughed well below all-time / Financial Crisis lows. In our view, this supports the idea that US equities are in a bottoming process, but from a contrarian perspective the setup seems more intriguing in Small Caps and the Dow (a proxy for the old economy and Value) than Growth and the New Economy.