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Welcome to RBC’s Markets in Motion podcast, recorded October 11th, 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 run through the results of our latest RBC US equity analyst survey, an exercise that we run through once a quarter.
The big things you need to know: First, our analysts generally remain optimistic. Second, they tilt most positive on Financials, Energy, Tech, Health Care, and Utilities. Third, the fiscal policy outlook is generally pretty neutral. Fourth, margin expectations have eased but only a handful of our analysts see supply chains as a major problem.
If you’ve got five minutes, let’s jump into a few of the details. While you’re waiting, a quick reminder that you can subscribe to this podcast on Apple, Spotify and other major providers.
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- Takeaway #1: Outlooks generally remain optimistic.
- Each quarter, we ask our analysts to rate their industries on a scale of +/-2 on performance as well as five other core issues, and also ask them whether they expect margins to expands, flatten or contract.
- Across all sectors, our analysts lean positive on the outlooks for performance, fundamentals, valuations, and cash deployment with the most optimism on cash deployment.
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- For the most part, this is similar to what we observed in our June survey, though it’s fair to say that fundamental outlooks slipped a little and valuation views improved a bit.
- Margin outlooks also deteriorated, and are now closer to neutral.
- Policy outlooks improved slightly, but are still pretty neutral.
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- Takeaway #2: Across all of the main questions we asked, our analysts tilt most positive on Financials, Energy, Tech, Utilities, and Health Care.
- Meanwhile, REITs and Industrials stand out as having the least optimistic assessments, again across all questions.
- On performance outlooks specifically, views are also neutral to negative on Communication Services, Consumer Discretionary, and Consumer Staples.
- As a reminder we use the results of the analyst survey as one of the inputs to our own strategy sector recommendations.
- The results continue to support our overweights on Financials, Energy, and Tech. We are still market weight Health Care, but have described it as our favorite defensive for periods of turbulence and the survey supports that view as well.
- It’s also worth noting that the sector biases are not concentrated in any one style – we are seeing the most enthusiasm percolating equally in Cylical/Value, Secular Growth, and Defense – which reinforces our belief that the style call has gotten a lot murkier.
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- Takeaway #3: Policy outlooks generally remain cool across all sectors.
- We saw a very modest improvement in fiscal policy views in our latest analyst survey compared to our June poll, but policy outlooks are still essentially in the neutral camp.
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- We added some new questions this time around about how corporate tax hikes, should they happen, would affect the earnings and performance of the industries they cover. For the most part, our analysts see higher corporate taxes as a moderate negative (a -1% to -5% hit) for both earnings and performance.
- Overall, the survey results lend support to our own belief that higher corporate taxes would be a modest, short-term negative for the broader US equity market.
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- Takeaway #4: Margin expectations have eased, but only a handful of our analysts see supply chains as a major problem.
- Margin outlooks have cooled off with only around half expecting expansion over the next 6-12 months.
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- On supply chains, just 14% said they are a major problem.
- Among those who say supply chains have been a problem, “moderate problem / getting worse” and “moderate problem / no recent change” were the most popular choices, at 18% each. Another 11% picked “moderate problem / getting better.”
- Meanwhile, 25% said supply chain disruption is not a problem for their industries, with another 14% saying the issue is not relevant to their coverage.
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- This illustrates a point that we’ve been highlighting in our work on sector earnings revisions recently. The supply chain problem appears to be one that is intense for certain sectors and industries, but may not be as dire for the broader US equity market as a whole as some of the September headlines suggested.
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- One of the big questions on investors’ minds is what we should be watching for to gauge when supply chain problems will improve. And so we also asked our analysts what indicators they and their companies are watching to gauge when supply chain pressures may abate. COVID and labor were most frequently referenced.
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- On this point, it’s worth noting that freight costs – an important barometer of supply chain pressures – finally started to post declines last week, something that’s not too surprising given that trends in global COVID cases – which have also peaked – have been a loose leading indicator for freight costs in the past.
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Before we wrap, one final thought on how our analyst survey compares to the investor survey we highlighted in last week’s podcast.
- Generally, our analysts are more constructive than investors, with more optimistic views on performance, valuation, cash deployment, and margins.
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- The idea that investors have been less optimistic on margins is an important thought ahead of 3Q reporting season, since it may mean investors are baking in supply chain pressures to a greater extent than the sell-side.
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 analysts in a variety of sectors and industries.