Welcome to RBC’s Markets in Motion podcast, recorded July 2, 2025. 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, we review the bull thesis that we heard in our investor meetings as 2Q came to a close, and our thoughts on where it could go wrong. Second, we review how the rally in equities has been looking a bit overdone on our valuation and EPS modeling, and how we’re also starting to run out of room on one of our sentiment studies. Third, conditions are rather mixed for US equities at the moment. We walk through things that look good, and things that look not so good.
If you’d like to hear more, here’s another eight minutes – a little longer than usual, as there’s a lot on our minds as the second half gets underway.
Now, let’s jump into the details.
Starting with Takeaway #1 - The Rapidly Evolving Bull Thesis
We ended 2Q on the road seeing institutional US equity investors in several different states. While it did not appear to us that they were uniformly bullish on US equities, some came across as downright excited and most of those who had been more tempered in their outlooks appeared to be talking themselves into a more bullish stance. It was striking to us how much the bullish thesis on US equities changed in June. Back in mid-to-late May, the thesis we heard in client conversations was essentially that the stock market had already paid the price for any tariff-related impacts on inflation and the broad economy/labor market, and that tax cuts and deregulation would be stimulative in 2026. As a result, many argued that it made sense to ignore any 2025 tariff-related potholes, and to look ahead to 2026.
While tax cuts and deregulation are still seen by many as stimulative, the focus on tax in particular has narrowed, with many investors making the case for a ramp-up in capex spend due to some provisions in the tax law (this has gone hand in hand with a high degree of bullishness on the extremely expensive Industrials sector). The cooler inflation data that has been seen recently has caused many investors to believe that there simply will not be any inflationary impacts from tariffs, and several also expressed doubts about any adverse impacts coming to labor or the broader economy. Instead of displaying a willingness to power through any tariff-related potholes, US equity investors seem to be gravitating towards the idea that there simply will not be any potholes. Anticipation of Fed cuts boosting stocks was something else we also heard a fair amount about as 2Q ended, which hadn’t been as prevalent in our May meetings. The benefits of a weaker dollar on earnings were also in focus for some and we’d estimate that about half of the US clients we spoke with at the end of June were excited about AI again, echoing the enthusiasm for the US/AI/productivity we’d heard in our non-US meetings several weeks ago from non-US based investors.
To be fair, not everyone we spoke with agreed with this rosy assessment, and we spent plenty as 2Q wrapped discussing with some investors how much pre-tariff inventories companies may have on hand and when those will run out, whether the pull-forward of demand will generate some weakness in future demand (and corporate revenues and earnings), whether companies will pass on prices or absorb tariffs, and whether any tariff-related potholes are simply being pushed into 2026 – delayed, but not disappeared.
Overall, we ended 2Q thinking that overall conditions in US equities didn’t seem frothy quite yet but were headed down that path. We also exited the week with a clear list in our head of how US equities could get derailed in the back half of the year. If we do end up getting some inflation pressure or broader economic potholes from tariffs or the Fed doesn’t cut after all, we think it will come as a negative surprise to many investors. If inflation impacts or broader economic potholes simply get pushed out into next year, it will dent the 2026 optimism that seems to be pulling in even the more cautious investors.
Moving on to Takeaway #2: The Rebound is Starting to Feel Full From a Few Different Vantage Points
One of the points we’ve been making in our meetings recently is that while we understood the stock market’s fierce rally from a sentiment perspective, it has been feeling a bit overbought to us from a fundamental perspective. Our earnings and valuation work, which bake in a stagflation environment with real GDP in the low 1% range, inflation in the high 2% range, 3 Fed cuts, and 10-year yields that fall below 4% by year-end point to a fair value estimate for the S&P 500 at the end of the year of 5,730. With a slightly more optimistic EPS assumption – one in line with the current consensus that is now tracking at $265 than our own $258 forecast – our modeling moves up a notch to 5,900. But it still falls short of current levels in the S&P 500 today. Inspired by our conversations last week, we put together a new “stress test” for our valuation model, baking in inflation that falls to 2%, just one Fed cut, 10-year yields that remain at current levels, and an EPS assumption of $270, which is slightly higher than the bottom-up consensus. That math still only gets us to 6,200, right in line with where we are today.
We also pointed out in our meetings last week that at the time of our last price target update, our sentiment work was making the case for the S&P 500 to move a bit higher, perhaps up to the 6,400 range. That model is based on net bulls in the AAII survey, and to be fair, there is still room for that indicator to move up before hitting levels (one standard deviation above the long-term average) that have foretold the tops in the market since 2022.
But when we put the rebound in the context of other moves off of extreme lows, it’s starting to look like there’s much less room for upside from here. We’ve analyzed how the S&P 500 tends to trade 9 months after experiencing major, non-recession drawdowns since the GFC (those of 10% or more, ex the COVID recession rebound), a time frame that approximates the window between the April 8th low in the S&P 500 and year-end 2025. The average 9-month rebound has been 26%, which this time around would take the index up to 6,270 – not too far away from current levels.
At this point in time, with a 25% move off the low as of Monday’s close already in the books, the rebound off the April 8th low is also trading hotter than all of the other rebound trades we’ve studied.
Wrapping up with Takeaway #3 – conditions seem mixed… here’s a rundown of the good and the not so good that we see in our weekly deck.
Let’s start with the good:
- Bottom-up consensus 2025 EPS growth rates and 2025-2026 operating margin forecasts for the S&P 500 have stabilized,
- As our clients noted the weaker USD should be a good talking point for companies in the upcoming reporting season,
- Small Caps – a key risk barometer – are still in net short territory on the weekly CFTC futures positioning data which points to oversold conditions in riskier assets,
- Expectations for Fed cuts have deepened (which tends to boost equity prices),
- The positive inflection in consumer confidence held up in the latest Conference Board survey despite ticking a little bit lower relative to the prior month,
- Views on the policy backdrop ticked up a little in the University of Michigan survey,
- The equal weighted S&P 500 P/E still has some room to move up before hitting recent highs (which makes the case for a broadening in leadership),
- and US equity flows are holding up (even though passive retail flows are softening, institutional passive flows are picking up).
- Meanwhile, at the time this podcast was recorded, the tax bill that has been at the center of equity investors’ bullish market view is making progress in Congress – though we do worry that this is largely priced into stocks already.
- On the topic of the tax bill, it’s interesting to note that the US equity market made a major peak about a month after the passage of Trump’s first tax package at the end of 2017.
Meanwhile, the not so good:
- The rate of upward EPS estimate revisions for the S&P 500 is already back to post-COVID/non-crisis rebound highs making us wonder if this is as good as it gets for 2025 earnings,
- Bitcoin prices (which tend to move in sync with the S&P 500) have stalled - which makes us nervous about risk assets generally,
- and the market cap-weighted median P/E of the S&P 500 has returned to more than 25x (which is close to its pre-COVID high and adds to the case for a broadening of leadership near term).
- Meanwhile, 2Q25 GDP forecasts have moved up sharply, but we haven’t seen the same kind of movement in 3Q25 and 4Q25 forecasts.
- Even more important, we got further evidence last week through the Richmond Fed/Duke CFO survey that the c-suite has not experienced the same kind of positive inflection in sentiment that has been seen in recent consumer, small business, and investor surveys. This is the third major c-suite survey that has come out recently that has seen sentiment deteriorate.
- One thing we like about this survey is the ad hoc topical questions they ask. This time, they probed tariff views where we saw evidence that capex plans for many firms have been impaired due to tariffs…
- …and that many companies do intend to pass through higher prices, particularly those in manufacturing.
- This survey – along with the fact that there hasn’t been much attention given to tax cuts in this year’s corporate earnings calls – did not leave us feeling good about the assumption many of our clients are starting to make that capex is on the cusp of booming and inflationary impacts from tariffs aren’t coming.
- The latest ISM release left us with the same impression, as new orders remained weak. When we exclude the top 10 market cap names in the S&P 500, trends in ISM new orders tend to lead actual capex spend by about a year. If the c-suite were getting ready to do a big wave of capex, we’d expect to see ISM new orders moving up.
That’s all for now. Thanks for listening. And be sure to reach out to your RBC representative with any questions.