Welcome to RBC Markets in Motion, recorded July 2nd, 2024. I’m Lori Calvasina, Head of US Equity Strategy at RBC Capital Markets. Please listen to the end of this podcast for important disclaimers.
As the 2nd half of 2024 gets underway, we’ve updated our thoughts on the top 10 things we’re thinking about in US equities, as well as our S&P 500 forecasts.
Three big things you need to know:
- First, we are lifting our YE 2024 S&P 500 price target to 5,700 from 5,300, which we would characterize as a nervous raise.
- Second, we think the risks of a short-term pullback in the S&P 500 are growing, similar to what occurred in April.
- Third, on positioning, we think it will be tough for the US equity market to see a sustainable leadership transition away from mega cap Growth until we are through the economic soft patch.
We’re only going to be able to skim the surface here, but if you’ve got another five minutes, let’s jump into some of the details.
While you’re waiting, a quick reminder that today, July 2nd, is the last day of II voting for those who have already secured a ballot. If you’ve found our work helpful, and have another five minutes, please take a few minutes to add our name to your ballot.
Now, let’s jump in.
Takeaway #1: As noted earlier, we’ve lifted our YE 2024 price target to 5,700 from 5,300.
- This is a very quantitative exercise for us. We have five models that we use to arrive at our price target. In terms of process, where possible we’ve shifted from looking at 12 month and full year back tests, to 6 month and 2nd half back tests.
- The median outcome is 5,706 which we round to 5,700.
- The range runs from 5,200 at the low end – which comes from our valuation model. We do think stocks are a little overvalued right now.
- Our economic modeling, which looks at how stocks performance in 2-4% GDP years, is also a little below our target, coming in around 5,300.
- At the high end, our cross asset test, which look at how stocks perform when the earnings yield gap is flat, is pointing to more than 5,800.
- We get similar reading on our politics test, which looks at how the S&P 500 performs in the 2nd half of Presidential election years.
- One of our sentiment models is coming in in the middle a little above 5,700 – AAII net bulls just a little below the 1 standard deviation mark – that’s typically followed by a 4.5% return on a 6-month forward basis.
- As noted, we’ve not put out a 2025 target but we have looked to see what our models are telling us about 2025 full year returns and 12 month forward returns. The median outcome of our modeling is 6,159. We once again see a range of outcomes, with 5,900 at the low end, and close to 6,400 at the high end. Three of our models are clumped in the 6,100-6,200 area. There is a fair amount of uncertainty in our economic modeling for next year that we’d like to get clarity on before committing to a target. There’s also a lot of political fog in next year’s outlook.
- As a reminder, we view price targets as more of a compass than a GPS, a signaling mechanism that’s really designed to help provide some structure on our overall message on the market. Overall, we see a little more room to move up in the S&P 500 this year – we think the market has gotten ahead of itself on valuation, but probably still has some room on much of our sentiment, cross asset, and political work. And if GDP growth stays healthy next year, i.e. above 2%, our models are telling us there’s a decent amount of room to move up in 2025 even from a valuation perspective.
Moving on to Takeaway #2: why we’re getting worried about the possibility of a short-term pullback again.
- How we feel about the stock market today is very similar to how we felt at the end of March, the last time we raised our price target for YE 2024.
- We see a path higher for stocks over the next 12-18 months, but are also cognizant that there’s probably a decent sized pothole in our path that we’re going to have to power through at some point.
- So what specifically is making us worried about another big pothole – I’d point to a couple things:
- Some of our sentiment work – CFTC data on US equities futures positioning just hit a new high driven by spikes in positioning for S&P 500 and Nasdaq 100 contracts; AAII net bulls are still constructive for now on a 6-month view…
- but what’s bothering me is that it’s been hovering a little bit below the 1 standard deviation mark which is where the stock market ran into trouble last August and this past April.
- Seasonality is also worrying me – if you look back over the past decade, the S&P 500 is usually strong in July, but experiences some monthly losses in August, September and/or October.
- Also, it’s a Presidential election year – we haven’t had it yet but we do usually see a bit of a sell-off in Presidential election years before markets rally back; when we look at it from a volatility perspective, sometimes they are mild, but there usually is an uptick in the VIX in Presidential election years at some point.
- We’re also hitting a softer patch economically. We’ve seen a little bit of slippage on GDP forecast for 2024 from 2.4% to 2.3% recently, US economic surprises are negative (though no where near past growth scare or recession levels), and consumer confidence has taking some hits and concerns about how well they are weathering inflation are being debated.
- I do expect a drawdown to be mild and in the 5-10% range. Anything more is typically associated with a growth scare in which recession fears flare up.
Wrapping up with Takeaway #3 on positioning: we think we need to get to the other side of the economic soft patch for mega cap Growth to hand over the leadership reins.
- There are a lot of reasons to stay on guard for a rotation away from this part of the market
- Growth flows have faded,
- Valuations of the top 10 market cap names have failed to push through their 2021-2022 ceiling which is around 30x on forward P/E,
- CFTC positioning in Nasdaq 100 futures has spiked again and is close to past peaks,
- 2024-2025 EPS growth forecasts for the Mag 7 are ramping down while the rest of the market is ramping up,
- And long-term EPS growth expectations for the top 10 market cap names appear to be topping out.
- It’s still fair to say that the mega cap Growth trade is highly crowded and overvalued at a time when its fundamental appeal has been expected to fade relative to the rest of the market.
- But doubts are creeping into the fundamental side of things, which is why we think leadership rotation attempts haven’t been sustainable.
- Earnings sentiment (revisions) turned stronger for the top 10 than the rest of the market again during 2Q.
- Consensus GDP forecasts are also now calling for quarterly GDP growth (yr/yr ) to decelerate to below-average levels. In recent years, Growth tends to outperform when GDP is below average and to underperform when GDP is above average.
- One new thought here: political dynamics may also be helping the Growth trade indirectly.
- US/European equity market performance has been closely correlated with the Trump-Biden spread in betting markets – we think this is because of the perception that Trump’s foreign policy and trade policy are more isolationist and America first.
- Similarly, we’ve also found that Growth/Value relative performance within the US has been closely correlated with the Trump-Biden spread in betting markets.
- As domestic political dynamics have pushed money into the US, it’s been benefiting the biggest names.
That’s all for now. Thanks for listening. And be sure to reach out to your RBC representative with any questions.