Welcome to RBC’s Markets in Motion podcast, recorded June 23rd, 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, solid earnings stats are in place as US equity investors wait for the onset of 2Q25 reporting season. Second, the latest Business Roundtable survey highlighted weaker corporate vibes relative to March, echoing the tepid tone in last week’s earnings calls. Third, we recap our views on how we’re thinking about the recent developments in the Middle East from a US equity market perspective.
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Now, let’s jump into the details.
Starting with Takeaway #1: Solid Earnings Stats Are In Place As US Equity Investors Await The Onset of 2Q25 Reporting Season
- Even with everything that’s been going on, we got several questions on our earnings outlook last week from investors.
- Our latest checks suggest there’s no reason to change our $258 S&P 500 EPS forecast for 2025.
- Meanwhile, we’ve been keeping an eye on our favorite gauge of earnings sentiment for the S&P 500 – the rate of upward EPS estimate revisions – which fell to typical non-crisis lows for the S&P 500 in April, and has now rebounded to 55%, a level that’s not back to post crisis highs (which seems fitting since this indicator never fell to crisis lows) but has returned to post-COVID highs. The recovery that’s already happened makes us somewhat concerned that this stat is about as good as it gets for 2025.
- We also keep a close eye on where bottom-up consensus forecasts for the S&P 500 are relative to last summer. At the end of May 2025 the bottom-up consensus for full-year 2025 S&P 500 EPS was down 5% vs. the level in place at the end of June 2024, a little less of a decline at this point in time than the median cut in years where forecasts start out too optimistic. Importantly, in most years the bottom-up consensus EPS forecast ends up being fairly stable in the 2nd half of the year in question - reflecting the idea that companies push hard in the second half to meet expectations and, before that, to help set them. If negative revisions are coming for 2025, July and August are the time we’d expect to see them.
Moving on to Takeaway #2: Corporate vibes have been weak.
- Late last week, the widely watched quarterly Business Roundtable survey was released and showed a sizable drop in the CEO economic outlook relative to March.
- The survey was conducted in the first two weeks of June, and also reflected a sizable drop in employment expectations and to a lesser degree capex. The economic outlook question came in slightly below the lows of late 2022 and 2023, and almost back down to the lows of late 2015. When risk off sentiment has hit the stock market this year, we’ve tended to see more of a rising risk of growth scare (14-20%) drop as opposed to recession pricing (where the market tends to lose a quarter to a third of its value), and this data point lends support to that theory in our view.
- The weak C-suite vibes highlighted in the survey echo the overall tepid tone that we sensed in last week’s earnings calls. Uncertainty from geopolitics and other sources, consumer health, and tariff management/impact remained in focus.
- Other key, recurring themes included strength in AI and datacenters, the need to navigate with prudence and flexibility, and cost containment - we were surprised how prominent the latter topic was, but discussion around this issue has been on the rise in recent months.
Wrapping up with Takeaway #3: Recapping our views on what the escalations in the Middle East mean for US equities.
- It remains our belief that the longer and broader the conflict becomes, the more challenging it is likely to be for US equities. These escalations come at a tricky time, as the S&P 500 has looked fairly or even a bit overvalued to us from a fundamental perspective, but with more room to run from a sentiment perspective.
- The three main concerns we’ve had are: 1) the tendency for valuations to compress when uncertainty regarding national security rises, 2) the potential for the event to derail the recovery in investor, small business, and consumer sentiment that has been underway - and to deepen the deterioration in corporate sentiment that has persisted, and 3) upside risk to oil prices. Lack of conviction that oil supply is at risk has, in part, kept stocks calm, but this thesis may soon be tested.
- Zooming out, the fog in the US equity market outlook - which had dissipated a bit from a tariff perspective since mid May - has gotten much denser in the past week due to geopolitics. In thinking about potential downside, we rely on our “four tiers of fear framework” for US equity market drawdowns, which helped us navigate tariffs as conditions evolved in March and April. It reminds us that a 5-10% S&P 500 drawdown is a good starting point to assess potential downside risk when confronted with any major uncertainty and we think that’s a good starting point for thinking about downside risk today, especially since we’ve seen these kinds of reactions in stocks since 2023 to earlier episodes in current conflict.
- If stocks sell off, it will be important to monitor the risk of a retest of the April 2025 low - which was a textbook tier 2 growth scare low - since our valuation stress test that takes inflation back to 4% points to possible downside in the S&P 500 to the 4800-5200 range, using various flavors of earnings. Besides an inflation spike, sentiment erosion could spark this if recession fears start to percolate again. These risk scenarios would likely take some time to play out, potentially allowing the stock market to be patient in how it trades.
That’s all for now. Thanks for listening. And don’t forget to vote!