Welcome to RBC’s Markets in Motion recorded October 16th, 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.
Three big things you need to know today:
- First, we are lifting our S&P 500 EPS forecasts to $223 (up from $220) for 2023 and to $232 (up from $229) for 2024.
- Second, 3Q23 reporting season is off to a good start in terms of stock price reactions, even though EPS revisions have turned slightly negative and company commentary among the early reporters suggests that the uncertain macro is taking a toll.
- Third, other things that jump out from our high frequency indicators include an improvement in equity investor sentiment last week and the return of outflows from US equity funds.
If you’d like to hear more, here’s another five minutes. Now, the details.
Takeaway #1: Changes to our S&P 500 EPS Forecasts
- We are lifting our 2023 full-year EPS forecast to $223, up from $220. At the same time, we are lifting our 2024 full-year EPS forecast to $232, up from $229.
- With these moves, our 2023 forecast is $1 above the bottom-up consensus of $222 and our 2024 forecast is more meaningfully below the bottom-up consensus which is currently $247.
- The changes are driven by shifts in forecasts for the macro variables that we use in our model to forecast revenues, margins, and other inputs.
- Our 2024 forecast assumes a significant moderation in inflation, easing of interest rate pressures in the back half of the year, and sluggish GDP and industrial production forecasts. This is the current consensus view among economists, but may be revised as 2024 outlooks are refined.
- Additionally, our 2024 EPS forecast assumes less robust revenue growth than the bottom-up consensus, and assumes a less rosy view of where margins are headed. Our model bakes in a return to 2022 type margins, but consensus bakes in significant margin expansion.
Moving on to Takeaway #2: 3Q23 Reporting Season Is Off To A Good Start In Terms of Stock Price Reactions, Even Though The Macro Is Taking a Toll
Here’s what jumps out to us on the stats for 3Q23 reporting season so far:
- First, the Russell 1000 companies that have beaten consensus are outperforming the broader market so far, at the 2ndhighest rate we’ve seen in the past year and a half.
- Second, the rate of upward EPS estimate revisions for the S&P 500 has turned slightly negative in early October. This reverses the slight bias towards upward revisions we’d seen in August and September.
- Third, our review of S&P 500 earnings call transcripts since late September suggests the macro is taking a toll. Companies continue to emphasize the resiliency of a consumer who has become more selective in their spending. We are also reading about how macro uncertainty, including inflation and interest rate policy, are impacting demand and spending, though this is more on the corporate side. Pricing commentary remains mixed, with a fair amount of emphasis on how it’s moderating. Labor force reductions as a cost savings mechanism is another theme that’s jumped out.
Wrapping up with What Else Jumps Out From Our High Frequency Indicators
- First, Large Caps no longer have an advantage over Small Caps on earnings revisions trends. This is positive for the beleaguered Small Caps, which look deeply undervalued but have been lacking a catalyst. In recent meetings, we’ve been emphasizing that equity investors need to get more confident that Fed cuts are coming and a recession can be avoided for Small Caps to lead again.
- Second, amid a darkening geopolitical backdrop and domestic political dysfunction in Washington, we were stunned that AAII net bullishness actually moved up a little bit last week to +3.5% in favor of the bulls. While this is explained by the ongoing difficulties equity investors have pricing geopolitical risk, a decent start to earnings season, and easing interest rate fears, the deep pessimism on this indicator that would help us get past our near-term concerns about the US equity market remains elusive.
- Third, US equity flows have deteriorated and slipped into negative territory on a four-week average. US bond inflows have also continued to fade, while global equity and global bond flows have also now turned slightly negative. Within US Large Cap, passive inflows are fading, Growth flows have turned negative, and Value outflows are worsening again. Every category of Small Cap flows we track has worsened. At the sector level, Consumer, Financials, and Industrials are all worsening and/or have turned negative.
That’s all for now. Thanks for listening. And be sure to reach out to your RBC representative with any questions.