Welcome to RBC’s Markets in Motion podcast, recorded January 9th, 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.
Today in the podcast, an update on our S&P 500 sector outlook for 2025, and the results of the quarterly RBC analyst survey that we just updated in late December
Three big things you need to know:
- First, globally – taking into account the views of our analysts in all of our coverage regions -- our analysts tilt constructive on performance, valuations and demand, but have more mixed/neutral views on the US and non-US political backdrops.
- Second, our work on global equity funds flows highlights how US, growth-oriented sector, and most cyclical sector flows faded in the final weeks of 2024, while Western Europe and defensive sector flows improved marginally.
- Third, within the US we have upgraded Utilities to overweight and, to offset the move, have downgraded Energy to market weight. The views of our US analyst teams as captured by the survey results really drove these changes.
If you’d like to hear more, here’s another six minutes.
Now, let’s jump into the details.
Takeaway #1: First, globally, our analysts tilt constructive on performance, valuations and demand, but have more mixed/neutral views on the US and non-US political backdrops.
- Regionally, performance outlooks are most constructive on the US and Australia, valuation views are most constructive for Europe and Canada, and demand views are most constructive for Australia.
- There was an important regional divergence in our analysts’ views on the US political backdrop. Our US analysts are modestly bullish, while our Canadian and European teams are bearish.
Moving on to takeaway #2: our work on global equity funds flows revealed some important shifts in the final weeks of 2024.
- US equity flows faded with some brief outflows returning.
- Meanwhile, flows to western European equity funds remained negative, but outflows lessened in intensity.
- Within the US, most cyclical sectors including Financials, Materials, and Industrials, …
- …as well as growth-oriented sectors like Consumer, Telecom and Tech saw flows fade in the final weeks of 2024.
- Meanwhile, while outflows from two key defensive sectors – REITs and Health Care – also lessened in intensity.
Moving on to takeaway #3: on the back of our survey, within the US we have upgraded Utilities to overweight and, to offset the move, have downgraded Energy to market weight. The US survey results really drove these changes.
When we look at the survey results from our US analysts here’s what jumps out at the US sector level:
- Performance outlooks are most constructive for Utilities, Financials, and Health Care. Our analysts are least constructive on performance for Real Estate.
- Valuation views are most constructive for Utilities, followed by Energy, and are least constructive for Real Estate and Consumer Discretionary.
- Demand views are also most constructive for Utilities and are least constructive, with a negative tilt, for both Consumer sectors and Materials.
- On the US political backdrop, our US analysts are most constructive on Energy and Financials, and least constructive for the two Consumer sectors.
- Across all five of the questions that we asked in the survey, our US analysts are generally most constructive on Utilities and Financials and least constructive on Consumer Staples.
As you can tell, Utilities kept coming up again and again as an area of high analyst conviction and enthusiasm in the survey.
This was one of the main things that compelled us to upgrade it from market weight to overweight.
- With this upgrade, we are designating Utilities as our top defensive sector – a statement we think is in order given the recent weakness in the broader market which may not have fully played out yet.
- We’ve had concerns about the valuations of this sector, which have admittedly been slightly expensive on our models. But that concern is outweighed by the enthusiasm for the sector that we saw in our survey results among our US analyst team who think valuations are better than our strategy models suggest.
- In terms of our other quant work, EPS and sales revisions have remained positive.
- As we discussed sector outlooks with clients in December, it also became apparent to us that this sector is somewhat insulated from some of the US political debates that will play out in the year ahead on taxes and tariffs, and are mindful that this sector was one of the best performers within the S&P 500 in 2018 during the China trade war.
- It’s also worth noting that this sector’s EPS revisions have historically been less sensitive to a stronger USD than other sectors within the S&P 500.
As noted, to offset the Utilities upgrade we have downgraded Energy to market weight from overweight.
- Unlike Utilities, Energy is a sector where our US analysts’ enthusiasm has come down significantly in recent quarters. In our latest survey, the performance outlook for US Energy was only very mildly positive.
- On our own quant work, other pieces of analysis arguing for a downgrade include ongoing challenges with funds flows and weak earnings revisions trends.
- Despite our downgrade, we stress that US Energy feels very much like a sector that should be a market weight, not an underweight. Relative performance has started to improve in recent weeks as geopolitical concerns have been rekindled, and our survey indicates that our US analysts still see valuation appeal in the sector, a conclusion our own quant work agrees with.
- Our survey work also highlights how our US analysts continue to see Energy as having more political tailwinds than other US sectors.
Note that there are no changes to our other S&P 500 sector views. We remain overweight Financials and Communication Services. Underweight REITs and Consumer Staples. And market weight other GICS level 1 sectors.
That’s all for now. Thanks for listening. And be sure to reach out to your RBC representative with any questions.