Welcome to RBC’s Markets in Motion podcast, recorded January 31st, 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.
This week in the podcast, we highlight the most interesting question we got last week, some thoughts on earnings, and updates on our high frequency indicators. Three big things you need to know:
- First, layoffs for Tech are spiking, a necessary step in the bottoming process for the stock market, while industrial layoffs remain low, supporting the soft landing thesis.
- Second, as we combed through the earnings data, a case for stocks may be starting to emerge on 2024 EPS.
- Third, we review what jumped out the most on our high frequency indicators last week in terms of sentiment, valuation, and performance, which generally supports the soft landing thesis and suggest that last week’s strong move in US equities was justified.
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Takeaway #1, on our question of the week, layoffs for Tech are spiking, a necessary step in the bottoming process for the stock market, while industrial layoffs remain low, supporting the soft landing thesis.
- The most interesting question that crossed our desk last week was about how layoffs in industries of excess impact stock market performance.
- We took a look at trends in layoffs for Tech and Telecom around the TMT bubble, layoffs in Financials around the GFC, and layoffs in Industrials and Energy around the 2015-2016 growth scare. We then compared them to S&P 500 index levels.
- We found that the stock market often does bottom well before layoffs in industries of excess are finished.
- In some instances (Tech in 2002, Financials in 2009, Energy in 2016), the stock market’s bottoms happened around big spikes in layoffs in the industries in question.
- In some instances, two big waves of layoffs in the relevant industries were seen (Tech in 2001-2002, Energy in 2015-2016) and it wasn’t until the 2nd spike that stocks found a permanent floor.
- With Tech layoffs spiking now, and real estate layoffs having spiked last summer, it’s hard to say conclusively whether the data supports the idea that US equities bottomed in October.
- But the data does give us one more thing to check off in our list of things that we believe need to happen for the stock market broadly to bottom.
- The most interesting thing I discovered as I was going through this the industry layoff data, however, was that big spikes in Industrial layoffs occurred during each of the big periods of economic stress that we examined.
- That stands in contrast with today, when industrial layoffs have remained extremely low.
- The lack of major layoffs in the industrial segment of the economy so far supports the soft landing thesis, in our view.
- I think trends in Industrial layoffs are really what we want to paying attention to right now. If the US skirts a true recession, we continue to think it will be in part because the industrial economy is providing a bridge to the other side.
Moving to takeaway #2: a case for 2024 is staring to emerge in earnings season.
- Generally, as we’ve highlighted in recent weeks, the earnings backdrop has continued to soften. Within the S&P 500, the percent of companies beating consensus EPS has continued to slow….
- …dragged down the most by Communication Services, Industrials, and REITs.
- Most S&P 500 sectors are seeing downward revisions to consensus forecasts for EPS or revenues or both.
- And the bottom-up consensus EPS forecast has fallen to $224.
- S&P 500 revenue growth is also now expected to stall, while margins are expected to contract slightly.
- But that’s all in regards to 2023. 2024 stats continue to highlight possible recovery on the horizon.
- Embedded in the latest consensus forecasts remains the idea that EPS and revenue growth and margins are expected to recover next year.
- The bounce back is expected to be broad based, with every sector seeing improvement in 2024 EPS growth compared to 2023.
- It still seems early for investors to be shifting their attention from 2023 to 2024, but that may be what is happening nonetheless.
Wrapping up with Takeaway #3: what else jumps out from our high frequency indicators. Three things caught our attention…
- First, investor sentiment continued to show signs of recovery off extremely low levels in last week’s CFTC update on US equity futures positioning.
- The improvement was broad based, seen for US (S&P 500 futures) and non-US (MSCI EAFE & EM futures) as well as Small Cap (RTY futures) and Growth (Nasdaq 100 futures). With last week’s move the bounce for both broader US equity futures positioning and Nasdaq futures positioning appears to be roughly halfway back to previous highs, suggesting that the rally has room to run for now.
- Second, the S&P 500 looks attractively valued on P/E using 2022’s estimated EPS (either our forecast or bottom-up consensus) as well as using bottom-up consensus forecasts for 2024 EPS.
- Admittedly, the index still looks expensive on 2023’s estimated EPS, particularly on our own forecast. If the stock market continues to rally from here, it may be because investors are starting to value stocks on 2024 earnings rather than 2023.
- And third, the S&P 500 has started to diverge slightly from the 2002-2003 path. We view both 2002-2003 and today as similar periods of messy normalization following major crises.
- This chapter of the historical playbook has called for US equities to experience weakness through March before retesting, but not breaching, the October lows, and then embarking on a more sustainable recovery.
- This path has synced up with the expectations of many sell-side strategists and buy-side investors. The fact that the index is starting to diverge in a positive way suggests that investors may be trying to jump in ahead of the widely anticipated March retest.
That’s all for now. Thanks for listening. And be sure to reach out to your RBC representative with any questions.