Welcome to RBC’s Markets in Motion, recorded October 5th, 2021. I’m Lori Calvasina, Head of US Equity Strategy at RBC Capital Markets. Please listen to the end of this podcast for important disclaimers.
This week in the podcast, we’re continuing to explore the state of investor sentiment by digging into the results of our late September US equity investor survey. Four big things you need to know:
- First, pessimists on the overall US equity market continued to rise, but remained below past highs.
- Second, the deterioration in the overall stock market outlook occurred alongside persistent valuation concerns, and deteriorating margin expectations, as well as slipping optimism on cash deployment and the economy.
- Third, on the hot topics in the market, investors are most concerned about China, geopolitical risk, and monetary policy.
- Fourth, investors are still leaning into select parts of the reflation trade.
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Takeaway #1: Pessimists on the overall US equity market continued to rise, but remained below past highs.
- Those describing themselves as bullish or very bullish on the stock market over the next 6 to 12 months increased slightly, from 47% in June to 49% in September.
- But the most noteworthy move was that those with a bearish or very bearish view increased from 14% to 28%. The bears are still shy of their 2Q19 high of ~40%, but this was a sharp increase nonetheless.
- In our last few podcasts, we’ve discussed how individual investor sentiment has deteriorated so much its been on the cusp of sending a contrarian buy signal, and how institutional investor positioning in the futures market still seems early innings in its own process of unwinding.
- The results of our own survey support our belief that the unwind in institutional investor sentiment hasn’t fully played out yet, which may contribute to further volatility in the broader US equity market in the near term.
Takeaway #2: The deterioration in the overall stock market outlook occurred alongside persistent valuation concerns, and deteriorating margin expectations, as well as slipping optimism on cash deployment and the economy.
- Those who said that valuations are expensive or very expensive remained above 50% for the 6th survey in a row. At 52%, this stat is tracking a little lower than our June 2021 survey and is slightly lower than its peak of ~60% in 2Q20.
- Meanwhile, margin expectations deteriorated significantly for the 2nd survey in a row. Just 25% expect expansion over the next 6-12 months (down from 39% in June) while 36% expect contraction (up from 19%).
- On both cash deployment and the economy, the optimists still outweighed the pessimists, but the level of optimism was dialed back compared to our June survey.
- On cash deployment, 54% were bullish or very bullish, down from 61% in our June 2021 survey.
- Importantly, optimism on buybacks and M&A rose for the second survey in a row. It was capex and debt pay down where optimism fell.
- On the economy, 54% said that their outlook over the next 6–12 months is bullish or very bullish, but this too was down for the second survey in a row, from 73% in June and more than 90% in March.
Takeaway #3: There were some surprises in terms of the hot topics in the market, and how investors are thinking about those.
- We usually ask participants to tell us what’s keeping them up at night, making them either nervous or excited about the stock market. China related issues received the most mentions this quarter, followed by geopolitical risk and monetary policy.
- On our question asking when the Fed will start hiking and what the impact will be on the stock market, we saw a noteworthy increase in those who expected hikes to start in 2Q22 or 3Q22, and found that most still expect stocks to react negatively to that event with the impact in the market being felt ahead of time.
- Fiscal policy/higher corporate taxes and supply chains are also concerns, but the tone came across as measured.
- On the policy backdrop under Biden, 52% were in the somewhat negative or very negative camp, up from 42% in June and close to March levels.
- Most see higher corporate taxes as a negative for both performance and earnings, but the majority of people in that camp say it’s a moderate negative, impacting performance and earnings in the -1-5% range as opposed to something more severe and a decent number also think the impacts are already baked in.
- On supply chains, “I’m worried but not panicked” was the most popular response to our question about how our respondents believe supply chain problems will impact consensus earnings estimates, with 76% in this camp for 2H21, and 47% in this camp for 2022. Very few were in the “I’m extremely worried or panicked”
Wrapping up with Takeaway #4: Investors are still leaning into select parts of the reflation trade.
- In terms of positioning, Energy, Financials, and Value were the most popular choices for areas of the stock market that are likely to outperform over the next 6-12 months.
- These three areas also saw a pick up in optimism compared to June.
- The pick up in optimism on Energy occurred alongside a pick up in oil price expectations, and the increased bullishness on Financials was driven at least in part by the view that 10 year yields still have more room to go higher from here. More than half expect the ten year yield to top out in the 1.5-2% range.
That’s all for now. Thanks for listening. And be sure to check out our sister podcast, RBC’s Industries in Motion, where you can get insights from other RBC research analysts.