Welcome to RBC’s Markets in Motion, recorded June 24th, 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.
Three big things you need to know: First, the Duke CFO survey highlights how C-Suite confidence has remained steady, with monetary policy and automation in focus. Second, our new valuation stress test suggests the S&P 500 has been baking in optimistic views on inflation, interest rates, and the Fed. Third, recent funds flow trends point to a lingering desire for a shift in market leadership.
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Now, let’s jump into the details of the market.
Starting with Takeaway #1: C-Suite Confidence Remains Steady (a Good Data Point for Stocks), with Monetary Policy and Automation in Focus
Last week was a little light on economic data releases, and it was the Duke CFO survey that caught our attention. We learned four key things:
First, C-suite views on the broader economy were flat in 2Q, but remain in a recovery off 2022’s recessionary low. Optimism on one’s own company continued to outpace optimism on the general economy.
Second, cost pressures/inflation and non-labor cost worries rose, while worries about labor quality/availability and demand eased. Monetary policy remained the biggest concern with no real change in level of concern since the last survey.
Third, more than two third’s said the US election is not impacting investment plans but those saying the event is causing them to postpone, delay or scale down plans was not insignificant. This is something to keep an eye on, as it’s something investors have been asking about in our recent meetings.
Fourth, Automation and AI have been a higher priority for larger firms than smaller firms, highlighting yet another disadvantage for smaller companies.
Moving on to Takeaway #2: Our New Valuation Stress Test Suggests the S&P 500 Has Been Baking in Optimistic Views on Inflation, Interest Rates, and the Fed
We’ve added a new stress test to our valuation modeling. This is an optimistic scenario which bakes in lower inflation, lower 10-year yields, and more Fed cuts than the current consensus (this scenario bakes in PCE of 2.2%, 3 cuts, and 10-year yields that fall to 3.75% at year-end). To be clear, this is not our base case for year-end 2024. But it is a helpful exercise in terms of understanding what the stock market may be pricing in currently. These assumptions imply that a reasonable trailing P/E for the S&P 500 at year-end would be around 22.5x and that a fair value for the index would be 5,500 (assuming bottom-up consensus EPS of $245 is in the right neighborhood). That 5,500 index level is close to recent highs. While we consider our valuation model to be a compass, not a GPS, our work here nevertheless continues to make us worry that the US equity market has gotten a little ahead of itself in the short term due to a little too much optimism around interest rates and inflation after the latest CPI print/Fed meeting.
Wrapping up with Takeaway #3: Recent Funds Flow Trends Point to a Lingering Desire for a Shift in Market Leadership
Flows to US equity funds have been positive recently, with nothing remarkable going on in the aggregate aside from being below peak. But we did notice a number of interesting developments underneath the surface or in other geographies, which all point to a lingering appetite among market participants for a rotation in leadership.
In terms of other countries/regions, as we expected would be the case given recent political dynamics, flows to European equity funds have deteriorated, undoing the improvement that had been seen in recent months. Nevertheless, flows to other areas including Canada, Australia, and EM have been improving and are also turning positive.
Within the US, flows to Large Cap equity funds are still positive but well below peak. At the same time, Small Cap equity funds are seeing improving trends driven by a return of inflows to passively managed Small Cap funds.
In terms of sectors, there are also some early indications of a possible shift in preferences. Specifically, we are starting to see hints of improvement or stabilization in flows to cyclical and commodity sectors (most notably Energy). Utilities flows are still positive but have faded from peak.
Elsewhere in the AI and related industries trade, we aren’t seeing any deterioration in Growth or Tech flows yet but have been struck by how sharply positive the recent inflow trends have been to these areas. We’ll be keeping an eye on these two categories next week to see if there’s been any sudden shift that contributes to our understanding of why the Large Cap Tech trade stumbled as last week came to a close.
We do note that Tech and Growth inflows have been close to or above high-water marks recently raising the possibility that the Tech/Growth trade simply is in need of a rest.
That’s all for now. Thanks for listening. And be sure to reach out to your RBC representatives with any questions.