Welcome to RBC’s Markets in Motion podcast, recorded April 22nd, 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, earnings sentiment is at an important crossroads, with the rate of upward EPS estimate revisions having fallen to 30%. Second, what we read in S&P 500 earnings call transcripts last week keeps us in the camp that recession is not a foregone conclusion, makes us concerned that any adverse impacts from tariffs may be felt a little later in the year or even next year, and pushes us toward the idea that the consumer is holding up but still hasn’t been unscathed. Third, the idea that investors are rotating out of the US assets into other geographies is supported by recent funds flows data.
If you’d like to hear more, here’s another five minutes.
Starting with Takeaway #1: Earnings Sentiment Is at an Important Crossroads
We are entering the busiest stretch of S&P 500 earnings releases for calendar 1Q25, with 290 companies currently scheduled to report in the remainder of this week and next week.
- The process of resetting earnings forecasts has gotten underway, a necessary step in the bottoming process for stocks. One of the ways we track this quantitatively is by watching the bottom-up consensus 2025 EPS forecast for the S&P 500. That stat (which had been sitting comfortably above $270 for most of calendar 1Q) continued to fall over the past week and is now down to $265. We expect this number to go lower (our own top-down estimate, which bakes in a stagflationary economy and margin contraction, is $258), but it’s worth noting that important progress continues to be made here.
- We also like to keep tabs on earnings sentiment (particularly in periods of stock market stress) by tracking the rate of upward EPS estimate revisions to consensus estimates for the S&P 500. This is another bottom-up gauge and in our opinion it is at an important crossroads. After hovering in the low 40-50% range for most of calendar 1Q, this indicator has now fallen to 36% on the four-week average. On a weekly, unadjusted basis, this stat came in at 30% last week. Typically, for earnings to be derisked, we need to see this stat get to around 30% in a non-crisis backdrop, and 10-20% in a more dire scenario. If this indicator breaks below 30%, we think it’s reasonable to expect it to head toward that 10-20% range, which is likely to put more pressure on stock prices in the short term. One (small) piece of good news: The stronger US dollar had been a major headwind to S&P 500 earnings revisions, but recent USD weakness should mitigate this issue.
Moving on to Takeaway #2: What We Read Last Week Didn’t Settle any Key Debates
As our regular readers are well aware, we spend a lot of time during reporting season reading through earnings call transcripts, looking for macro insights. What we read last week (which was limited to S&P 500 earnings calls) generally kept us in the camp that recession isn’t a foregone conclusion, makes us concerned that any adverse impacts from tariffs may be felt a little later in the year or even next year, and pushes us towards the idea that the consumer is holding up but hasn’t been unscathed.
- Reporting season was heavily biased toward financial companies last week, who seemed to make a concerted effort to provide context for how investors should be thinking about the economy. Not surprisingly, macro discussions were intertwined with tariff discussions. Several major banks noted that they are anticipating slower growth and that while they are not anticipating a recession for now, the odds of one have increased materially. Several companies highlighted how the tariffs announced on April 2nd were much larger than they or their clients had anticipated, and how their clients were concerned about near-term and longer-term uncertainty emanating from this policy approach. Several alluded to the idea that the ultimate impact of the tariffs is unknown and that conditions were strong heading into this situation. Outside of the banks, we took note of how a couple of companies indicated that they’d seen less of a spring surge.
- The banks that reported last week, along with some of the non-financial companies, also made an effort to lay out how they thought business sentiment and/or financial markets were being impacted by the tariffs. Several highlighted the recent uptick in volatility and how they expected that to continue. A pause in investment, capex, M&A, and decision making in general were highlighted, though some also emphasized strong pipelines and the potential for a snapback. One bank noted that layoffs were not coming up in their many conversations with clients, though the need to raise prices and protect margins were apparent.
- For the most part, the banks that reported described consumer spending as healthy, stable, and in good shape. One bank jumped out with their comment that there is still a lot of liquidity among high-net-worth customers, but that they might have seen “the early signal of the impact of equity market declines.” Another bank also jumped out for noting that they had seen weather impact early in the year that had stabilized by late March.
- On tariffs, the financials that reported noted that impacts were indirect for them. Several said that they have been working with their customers to help them navigate the issue and to understand their exposures. Some companies reported that their customers were managing through tariffs with pricing, supply chain adjustments, pre-ordering, and scenario planning. A few observed that tariff impacts were more likely to be felt in the 2nd half of 2025 or 2026, while one suggested that small businesses might be more adversely impacted.
- Outside of tariffs, policy discussions highlighted the benefits of tax policy changes and deregulation, and the stresses of DOGE and USAID cuts and other government spending cuts that had been seen, along with the need to follow the immigration situation.
Wrapping up quickly with Takeaway #3: the geographical rotation in flows
- We spent some time on Monday reviewing the latest weekly funds flows updates from EPFR. Frankly, we lost count of how many of the charts we track were showing outflows. Most notably, EPFR’s data has shown outflows in recent weeks for US equities and US bond funds (including high yield and investment grade), as well as money market funds.
- The geographical rotation trade does appear to be back on, with equity flows to Western Europe, Germany, France, and UK all turning positive again or improving in the latest updates. Flows to other non-US geographies have been choppy but generally showing signs of improvement or positive flows as well. For now, the shift away from the US has some clear evidence in the funds flow data.
That’s all for now. Thanks for listening. And be sure to reach out to your RBC representative with any questions.