Surveilling the vibes - Transcript

Welcome to RBC’s Markets in Motion, recorded February 24, 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, we found more evidence of weakening investor and consumer vibes in last week’s data updates, while getting a mostly positive data point on corporate vibes, and a flattening in political vibes. Second, the rotation of funds flows from US equities to bonds and European equities strengthened last week.
If you’d like to hear more, here’s another six minutes.

We’ve spent a lot of time in our recent client meetings highlighting how several categories of vibes (investor vibes, corporate vibes, and consumer vibes) appeared to be fading or getting dented to varying degrees, while political vibes (i.e., public opinion of the new administration) have been strong, helping to push stock prices higher. The story evolved a bit last week, here’s what we learned:

  • First, investor vibes continued to weaken. We’ve been tracking investor vibes a few different ways. One of our favorite indicators, is net bullishness on US equities in the weekly AAII survey. In last week’s update, the four-week average on net bulls fell to -8.2% after the weekly data point came in at -11.3%. With this move, the four-week average is now nearly one standard deviation below the long-term average, a level last seen in November 2023 at the end of a 10% drawdown in the S&P 500 alongside a surge in the 10-year Treasury yield.
    • We spent some time exploring whether the survey tells us anything about where US equity funds flows are headed. What we found is that bearish AAII sentiment is usually accompanied by weak US equity inflows or outflows. US equity flows have been positive in early 2025 but weakening in terms of trend, and what we’re on the survey tells us that US equity flows are at risk of turning negative.
    • Other data points that highlight the recent weakening of investor vibes include the move lower in US equity futures positioning for all of the major contracts we’re tracking…
    • …the recent moves higher in the VIX, RVX, and TDEX…
    • …and the stall in bitcoin which up until very recently had been tracking the S&P 500 rather closely again.
    • Another data point worth taking note of – the widely followed Citi US Economic Surprise index turned negative last week for the first time in over a year.
  • Second, we saw additional evidence of weakening consumer vibes also came in last week. As our regular readers are well aware, we keep a close eye on the University of Michigan consumer sentiment survey given the fairly close relationship it has had with S&P 500 and Russell 2000 index performance (year-over-year) since COVID.
    • Last week, the survey released its final reading for February, which came in below expectations and below the prior month, at a level that makes it appear to us that the recovery in consumer sentiment that’s been underway since the recession-like lows of 2022 has been broken.
    • The decline in sentiment was felt across a number of cohorts including income and education.
    • In terms of partisanship, declines were seen for Democrats and Independents but Republicans were essentially flat.
    • The report also identified a 2nd consecutive month of heightened inflation expectations as one source of consumer angst.
    • This report comes on the heels of a disappointing retail sales report the prior week, disappointing guidance from a retail bellwether last week, and an S&P 500 reporting season that hasn’t (at least so far) provided much insight into the current state of the consumer today other than to allude to well-known themes from the past year of resilience, divergence between the low end and high end, choicefulness, ongoing pressure from high interest rates and prices, and a preference for experiences. We’re looking forward to seeing what the Conference Board Consumer Confidence survey due out this week and the many consumer companies expected to report earnings this week have to say on the current state of the consumer. We hope they will shed more light on recent trends.
  • Third, on the positive side, we got a mostly positive data point on the state of corporate vibes last week. Specifically, the Conference Board CEO Confidence Survey came in sharply above 4Q24 levels.
    • Improving sentiment was seen for both the broader economy and the participant’s own industry.
    • The survey was conducted from January 27th through February 10th, giving us a fairly current snapshot of corporate sentiment. Some of the details of the survey were interesting to us in light of questions we’ve been getting from investors about how current policy uncertainty may impact C-suite behavior. Most of the participants said their capex plans were unchanged, with a small uptick in those who were more bullish on capex. Forty-one percent also said they had no plans to change their employment levels, but we did see a downtick in the percent who said they would ramp up employment.
    • In our recent earnings transcript recaps, we’ve noted that C-suite optimism appears to have been dented by policy uncertainty. The results of the Conference Board survey lend support to the idea that their optimism has not been derailed.
    • We are continuing to keep a close eye on the corporate vibes, however, and note that survey data released by the Empire and Philly Fed last week did point to downticks in capex expectations among their survey participants.
  • Fourth, political vibes have flattened out. In our meetings, we’ve highlighted how the President’s net favorability in public opinion polls had turned positive in recent months and become correlated to S&P 500 performance, similar to how his polling data as a candidate had been trending with S&P 500 pricing.
    • We’ve also noted that views on the direction of the country had rebounded sharply in public opinion surveys. In recent updates, we’ve seen net favorability turn slightly negative again, and the improvement in views on the direction of the country flatten out, though both remain at much stronger levels than seen a few months ago.
  • The major indices fell sharply on Friday, with a number of reasons cited. We have been of the opinion that the stock market has been overdue for a 5-10% pullback, and the general weakening, denting, and flattening of the vibes that were expected to be strong in 2025 help us understand why it may finally be underway.
  • As noted earlier, flows to US equity funds have continued to deteriorate in the latest updates from EPFR. Meanwhile, flows to US bond funds have continued to surge.
    • We’ve been highlighting these two trends, along with less onerous outflows from Western European equity funds and German equity funds in recent weeks as possible signs of asset allocation out of US equities into bonds and some segments of European equities. The idea that we are seeing some rotation from US equities into European equities gained support in last week’s EPFR update, which indicated that flows to Western European and German Equity funds have finally turned slightly positive.

That’s all for now. Thanks for listening. And be sure to reach out to your RBC representative with any questions.