Welcome to RBC’s Markets in Motion podcast, recorded January 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.
The big things you need to know: First, our thoughts on last Friday’s jobs report and reaction in the S&P 500 and Russell 2000. Second, what we’re listening for in S&P 500 company earnings calls as 4Q24 reporting season gets underway. Third, updates on other high frequency indicators, including a new chart comparing market cap and net income concentration for the biggest names in the S&P 500.
If you’d like to hear more, here’s another five minutes.
Starting With Takeaway #1: Last Friday’s Jobs Report and Reaction in the S&P 500 and Russell 2000
The continued dialing down of Fed optimism, which got supercharged by the stronger-than-expected jobs report, hit the stock market on Friday, taking the S&P 500 down more than 4% below its late-2024 high and wiping out the S&P 500’s gains for the year. Importantly, at the Friday close, the S&P 500 was below levels that marked its low twice in December. With that move, we’ve been on the cusp of the 5-10% drawdown in the S&P 500 that we’ve been worried about for the past few months.
A few other thoughts here:
- First, our Rates Strategy team has had us prepared for an end to the cutting cycle in early 2025 for quite some time. Our valuation stress test that bakes in RBC house views on inflation, the Fed, and 10 year yields – which we’ve just updated to remove their previous call for a January cut, the one cut they’d been looking for this year until they changed their call on Friday afternoon – continues to point to a fair value of around 6,200 on the S&P 500 at year end 2025, the most conservative model in the five that we used to come up with our 6,600 YE S&P 500 price target for this year.
- Second, a pullback in the S&P 500 has been overdue from a sentiment perspective, with AAII net bulls coming in one standard deviation above the long-term average back in October – something that has been reliably signaling short-term 5-10% drawdowns in the S&P 500 in recent years.
- As a sidenote, that gauge of sentiment has been falling with net bulls back to 2.9% on the four-week average as of January 9th, and -2.7% in favor of the bears on the weekly unadjusted data point. We think it’s likely that sentiment will end up falling to levels similar to what was seen in the fall of 2023 when net bullishness bottomed out roughly one standard deviation below the long-term average – painful for stocks in the short term but something that improves the set-up for them longer term.
- Third, Small Caps were hit hard on Friday, which makes sense since this part of the US equity market has been used to express increasing and decreasing Fed dovishness for much of the past year and a half. Small Caps failed to see a major outperformance cycle following the Fed adjustment cuts of the mid-1990s, also causing us to believe something more than a modest Fed cutting cycle has been needed to get Small Caps outperforming in a sustainable way again.
- Unfortunately, we didn’t get that “something more” from Friday’s jobs report…. Small Caps tend to outperform when jobs growth is accelerating, a testament to how strong economic tailwinds can power outperformance in this part of the equity market, but Friday’s print wasn’t good enough to suggest that’s the environment we’re in yet.
Moving on to Takeaway #2: What We’re Listening for as Earnings Get Underway
4Q24 reporting season kicks off this week with a heavy dose of Financials and smattering of Industrials. Next week, and beyond, here are some of the things we’ll be looking for color on in our S&P 500 earnings call transcript reading:
- First, will companies try to keep expectations low? Over the last year, there has been remarkable stability in bottom-up S&P 500 EPS forecasts. One of the reasons why is that guidance issued in calendar 1Q24 was skewed to the downside.
- Second, what are companies saying about cost pressures and margins? We’ve sensed more concern about costs in recent quarters, and bottom-up consensus S&P 500 operating margin assumptions have been coming down. Layoff announcements have been low, and we’ll be monitoring that issue closely in commentary where it’s been low.
- Third, what are companies saying about the impact of the US dollar? We tend to see downward EPS estimate revisions in the S&P 500 when the US dollar is strengthening.
- Fourth, we are curious to see what companies are saying about taxes, tariffs, and the other big DC policy debates. In the initial weeks after the election, companies talked a lot at conferences about the benefits of easier regulation, but there was little discussion of tax policy. Meanwhile, there was a lot of tariff talk that focused on China, but very little acknowledgement of the possibility of broad-based tariffs, something very different than the 2018 experience. We are curious to see if this conversation evolves.
- Fifth, have we seen an unlocking of business activity, for both consumers and corporate customers, in the aftermath of the US election? Throughout much of 2024, companies were talking about how US election uncertainty was restraining business activity, and commentary on the election itself was well in excess of 2016 and 2020 levels. We are curious whether policy uncertainty on taxes and tariffs has been a new restraint on activity, or whether the passage of the election unfroze things.
- Third-party gauges of policy uncertainty have moved up recently on a variety of topics.
- Sixth, digging deeper into the issue of the post-election “vibes,” we are curious to hear what companies are saying about the state of low-end vs. high-end consumers. Last year, strength in the high end offset weakness in the low end, supporting the broader economy. We are curious to see if those dynamics are still in place, particularly since consumer sentiment (as tracked by the University of Michigan) has highlighted improvement in sentiment for lower-income brackets and those with less formal education, while trends in sentiment for higher-income consumers and those with more formal education have slipped. We’ve also seen a recovery in consumer sentiment for men on this survey, but a stall for women.
Wrapping up with Takeaway #3… What Else Jumps Out on Our High Frequency Indicators
- In early 2025 we’ve received several questions about whether the concentration of S&P 500 market cap in the biggest names has been justified from an earnings perspective. And so this week we added some new charts to our deck, which look at the top 5 and top 10 names – ranked by market cap – and how their share of the S&P 500 in terms of both market cap and net income has evolved over time. While the market cap concentration in both the top 5 and top 10 names exceeds the net income concentration slightly, it is noteworthy to us that both have been rising, which is not something we saw in the late 1990s heading into the Tech bubble when the increase in market cap concentration was not accompanied by an increase in net income concentration.
That’s all for now. Thanks for listening. And be sure to reach out to your RBC representative with any questions.