Tax Tidbits, TIMT Damage in Context Transcript

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Welcome to RBC’s Markets in Motion podcast, recorded January 9th, 2023. I’m Lori Calvasina, head of US equity strategy at RBC Capital Markets.

Today in the podcast, we run through some of the most interesting questions we got from US equity investors last week as 2023 got underway.

Four big things you need to know: First, we’ve seen the most discussion about this year’s tax policy changes from Industrials, Financials, Energy and Utilities.  Second, the three major growth/TIMT centric sectors account for almost all of the S&P 500’s decline in 2022, but the Tech sector is still a positive contributor to the index on a 3 year basis. Third, the malaise in Tech and leadership by defensive sectors may persist until the market starts to sense that a bottom in ISM manufacturing is close. Fourth, Small Caps are off to a solid start to the year. We think that will continue despite last week’s downtick in ISM manufacturing.

If you’d like to hear more, here’s another five minutes. While you’re waiting a quick reminder that you can subscribe to this podcast on Apple, Spotify, and other podcast providers.

  • Takeaway #1: We had some inbound on the new provisions in the Inflation Reduction Act…
    • There hasn’t been a lot of discussion of these in recent company transcripts, and we don’t view these as a major issue for the equity market.
    • But across the Russell 3000 we’ve seen the most discussion about the buyback tax from Industrials and Financials and on the corporate minimum tax for Energy and Utilities.
    • We’ll be keeping a close eye on this issue in the upcoming reporting period.
  • Moving on to Takeaway #2: We had another interesting inbound request looking for perspective on the impact of mega cap stock performance on the S&P 500 in 2022 and over the past 3 years.
    • We ran a contribution to return analysis of the S&P 500, which looks at the impact in terms of both weight and performance, and found that the three major growth/TIMT centric sectors (Comm, CD, Tech) account for 95% of the S&P 500’s decline in 2022, but the Tech sector is still a positive contributor to the index on a 3 year basis.
    • Interestingly, the top 10 stocks accounted for almost 2/3’s of the index’s decline last year.

 

  • Next, Takeaway #3: We had another even more interesting inbound asking us about the ISM manufacturing cycle and how to play it through sectors.
    • Within the S&P 500, Tech has been most positively correlated with ISM manufacturing trends, while Staples and Health Care performance has been most inversely correlated.
    • What this means to us from a positioning perspective is that until market participants become convinced that a bottom in ISM manufacturing is close, defensives may continue to lead and Tech may continue to suffer. But we see that as short-lived. Once market participants do sense a bottom in ISM is close, we expect Tech to work again and defensives to lag, particularly for Staples where hedge fund positioning has been close to peak.
    • It’s worth noting that takeaways are similar in Small Cap.
    • Within the R2000, Comm Svc, Materials, and Tech have seen the tightest correlations between performance and ISM manufacturing, while Staples and Utilities performance has been most inversely correlated with ISM.
  • Wrapping up with Takeaway #4: we’ve gotten a number of questions on our Small Cap overweight call recently…
    • Small Caps are off to a solid start to the year and are showing some modest leadership YTD.
    • We think that will continue.
    • Small Cap performance – relative to Large Cap – does tend to move in sync with the ISM manufacturing cycle.
    • But the key thing to be aware of is that Small Cap performance was already baking in a return in the ISM manufacturing index to typical troughs in the summer of 2022.
    • Small Caps have also been baking in the uptick in jobless claims that’s starting to materialize for quite some time.
    • When we layer in the fact that Small Caps are still deeply undervalued vs. Large Caps, it appears to us that Small Caps simply baked in a recession well ahead of time.

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