Welcome to RBC’s Markets in Motion podcast, recorded June 23rd, 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.
Today in the podcast, we discuss the results of our June survey of RBC’s equity analysts. This year, we’ve started polling the analysts at RBC that cover US companies to gauge their expectations for performance, fundamentals, valuation, margins, cash deployment, policy, and inflation for the industries they cover.
The big things you need to know: (1) Outlooks for performance over the next 6-12 months remain constructive, driven by optimistic views on fundamentals and cash deployment. (2) Our analyst survey provides a guide for the best ways to get exposure in three distinct parts of the US equity market - Financials & Energy within Cyclicals, Information Technology within Secular Growth, Health Care & Utilities within Classic Defense. (3) The survey helps to set the stage for what we expect to be an important earnings season, with roughly half of our analysts saying it is unclear to what extent inflationary impacts are baked in to company guidance and/or consensus estimates.
Slide 2
If you’d like to hear more, here’s another five minutes. While you’re waiting, a quick reminder that if you vote in the Institutional Investor All America Research survey and find our work helpful, that we appreciate your support in the Portfolio Strategy category this year. The survey is still open but expected to close later this week.
Now, the details.
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- Point #1: Outlooks for performance over the next 6-12 months remain constructive.
- Across all questions and sectors, our analysts lean positive on outlooks for performance, fundamentals, and cash deployment, with the most optimism on the latter. They also tilt positive on margins, but are closer to neutral on valuations and policy.
Slide 4
- On policy, one big thing that jumped out was that our analysts mostly see Biden’s spending initiatives as neutral for the industries they cover, and his tax plans as a clear negative.
- Digging down deeper within taxes, Biden’s desire to raise corporate taxes elicits the most negative responses.
Slide 5
- On cash deployment, another big thing that jumped out was that outlooks on this particular issue became a bit more constructive both generally and for most sectors relative to our March 2021 survey.
- In terms of specific actions, cash deployment outlooks in the 2Q survey were strongest for M&A, driven by Health Care and Information Technology. Strong cash deployment outlooks for Financials – one of the highest ranking sectors on this question -- were driven by buybacks, dividends and M&A.
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- Point #2: Our analyst survey provides a guide for the best ways to get exposure in three distinct parts of the US equity market – Cyclicals, Secular Growth, and Classic Defensives.
- Across all questions, our analysts lean most positive on Financials, Energy – two key parts of the Cyclical trade, Information Technology – a pillar of Secular Growth, along with Utilities and Health Care – legacy Classic Defense.
- Meanwhile, REITs – a sector we don’t place in any particular style bucket – and Materials – another Cyclical – stand out as having some of the least optimistic assessments.
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- On specific issues, Utilities gets the highest marks for valuations, while Industrials – another Cyclical – jumps out for eliciting the most valuation concern.
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- Margin outlooks are strongest for Financials, Industrials and Tech, but weak relative to most other sectors for Consumer Staples and Materials.
- While we retain our preference for Cyclicals, we do acknowledge what investors may seek out exposure in all three style buckets given choppy market leadership dynamics of late. The Fed’s tightening timetable has been pulled forward (causing some investors to take shelter in Secular Growth stocks), while strong levels of economic data are seemingly in place for some time to come (leading others to burrow deeper into Cyclicals). Deteriorating rate of change and possible peaks on a number of macro indicators are also a distinct possibility in the short term (making the case for a broad market pullback and a move into Classic Defensives).
Slide 9
- Point #3: The survey helps to set the stage for what we expect to be an important earnings season.
- In a new question in our 2Q survey, we asked our analysts to tell us to what extent they believe that inflationary pressures are baked in to consensus forecasts and/or company guidance for the companies they cover. This is likely to be a key question that investors will seek answers to in the upcoming reporting season.
- Nearly half of our analysts said that it is unclear. That was also the average response for most sectors. One notable exception was Consumer Staples, where our analyst team told us that they believe inflationary pressures are only baked in a little, making it the most negative overall sector view on this question.
Slide 10
- With such an important earnings season on the horizon, we dug deep into the margin question, asking our analysts to gauge to what extent different drivers of margins were positives or negatives for their industries.
- Across all sectors, labor availability is viewed by our analysts as the biggest headwind to margins, followed closely by labor cost.
- On the tailwind side, demand and operating leverage is seen as the biggest positive.
That’s all for now. Thanks for listening. And please reach out to your RBC representative with any questions.