Welcome to RBC’s Markets in Motion podcast, recorded March 24th, 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, trends in investor vibes were mixed last week, both in our quant work as well as last week’s investor conversations. Second, the median forward P/E for the S&P 500 has fallen sharply but remains well above average. We’ve also not yet seen significant adjustments to consensus EPS forecasts, which seems likely to keep confidence in P/E analysis low for now. Third, Small Caps (which have seen a greater degree of valuation correction) have continued to outperform Large Caps.
If you’d like to hear more, here’s another 5 minutes.
While you’re waiting, we have some good news to share. I was honored to be named to Barron’s list of the 100 Most Influential Women in US Finance for the second year in a row, along with fellow RBC Strategist Helima Croft.
Now, the details.
Takeaway #1: the trends in investor vibes were mixed last week/
It felt a little quiet in the US equity market last week. Other than the Fed meeting, the most notable development on the data front from a US equity market perspective was the mixed retail sales report at the beginning of the week. In our meetings with investors last week, we found a few common threads: (1) tariffs, and the challenges they posed to corporations, particularly those who had moved production to Mexico, remained highly in focus, (2) April 2nd was in focus as an opportunity for the narrative around tariffs to shift, and (3) equity investors were debating whether US consumers were actually pulling back on their spend, or simply shifting what they were spending their money on, with a bias towards the latter. While most investors we spoke with seemed more keen on the idea of seeking out opportunities in parts of the US equity market that have seen some valuation opportunity unlock, we also sensed a need to get more information, and to get through a cycle of (potential) EPS forecast adjustments, in order to be able to proceed with any degree of confidence.
Looking at data, there weren’t too many quantitative updates on the “vibes,” or departures from the trends in them that we’ve been highlighting over the past few weeks. Here’s what we learned that’s incremental:
- Trends in investor vibes were mixed last week. Net bulls on the weekly AAII survey (a gauge of retail investor sentiment) remained quite weak, with net bulls once again more than two standard deviations below the long-term average and down at levels associated with the 1990-1991 recession, the Financial Crisis, and 2022 when the Russia-Ukraine War and inflation spike occurred. On a weekly basis, net bulls came in at -36.5% with the four-week average down at -38.9%.
- On the institutional side, US equity futures asset manager positioning per CFTC’s weekly update has continued to fall, but remains in the early innings of its decline, which we think accurately captures the tone in our conversations with equity investors in recent weeks.
- Meanwhile, signs of stress in the options market eased with VIX, RVX, SDEX, TDEX, and MOVE all coming down.
- Bitcoin, which has been aligned with the S&P 500 recently, also crept up.
- Despite a continued push into Europe and Germany in the EPFR funds flows data…
- …flows to US equity funds did pick up a bit.
- Shifting gears to corporate vibes… a new (to us) data point on corporate vibes highlights recent deterioration. We initially missed the update to the Chief Executive magazine CEO survey that came out on March 10th, but caught up with this release last week as we were reviewing our charts on C-Suite sentiment on Friday. In that survey, which was conducted in early March, CEO confidence fell sharply, with a worse drop than what we saw on the Business Roundtable survey. The declines in both of those surveys stand in contrast to the increase in CEO confidence that was seen on the Conference Board CEO confidence survey released in February. The Chief Executive Magazine survey results highlighted deterioration in views on current conditions and expectations, heightened concerns about tariffs and an economic slowdown, and an expectation for higher prices. Our work had been suggesting that corporate vibes have been holding up better than consumer and investor vibes, but the recent corporate surveys are telling us that the corporate vibes may have seen some of that resilience erode. We will have a better read on the state of corporate vibes once 1Q25 earnings season ramps up in a few weeks.
Moving on to Takeaway #2: S&P 500 valuations aren’t cheap yet.
- The median P/E of the S&P 500 is down to 17x, a big improvement but still well above its long-term average of 15x. It’s tough to have confidence in forward P/Es right now given the need for EPS expectations to be adjusted, but we still find it useful to keep an eye on the trends here. In our investor meetings, some have asked whether the recent rotation out of the US and into Europe might soon reverse. On the US side, we don’t see a valuation justification for that kind of shift yet.
- Downward revisions to consensus S&P 500 EPS forecasts have been modest, with 41% of revisions still to the upside on the four-week average.
Wrapping up with Takeaway #3: Small Caps are holding up well.
- Small Caps have continued to outperform Large Caps….
- With the Russell 2000 market cap weighted forward P/E still down at 14.3x (well below the 15.1x average) we are comfortable nibbling here….
- … We would like to see positioning in Small Caps per CFTC’s US equity futures positioning data come down a bit more. In investor meetings, we’ve been noting that the Small Cap part of the US equity market seems less exposed to US outflows by investors moving money into Europe.
That’s all for now. Thanks for listening. And be sure to reach out to your RBC representative.