Welcome to RBC’s Markets in Motion, recorded September 23rd, 2024. I’m Lori Calvasina, Head of US Equity Strategy at RBC Capital Markets. Please listen to the end of this podcast for important disclaimers.
Two big things you need to know: First, valuations continue to look full for 2024 on the S&P 500, but our model argues for upside in 2025. Second, there’s a lot of little stuff to talk about right now. We run a few of the key updates on our high frequency indicators including those on the rotation trade, small caps, and the election.
If you’d like to hear more, here’s another 5 minutes. Now, let’s jump into the details.
Takeaway #1: Valuations Continue To Look Full For 2024 On The S&P 500, But Our Model Argues For Upside In 2025
Last week the Fed kicked off it’s first post-pandemic cutting cycle with a 50-basis point move and an updated set of economic forecasts. And so we’ve taken the opportunity to refresh the stress tests that we use with our S&P 500 valuation model, which forecasts a trailing P/E for the index for Dec 2024 and Dec 2025 based on views of where PCE, 10 year yields, and Fed Funds are headed.
The punchline: our most generous stress test for 2024 continues to suggest valuations are full (and the S&P 500 is already trading a little above where it deserves to at year-end 2024), but that there are reasons to be optimistic about further upside for the S&P 500 in 2025 (given consensus views for strong EPS growth and more improvement in inflation and, interest rates).
While we have not issued an official YE 2025 S&P 500 price target, it’s worth noting that the various stress tests in valuation model (1 of 5 pieces of analysis we typically use in our target process) point to the S&P 500 reaching ~6,200 by YE 2025 on our EPS forecast of $268, or ~6,500 using bottom-up consensus EPS of $283.50.
A related fun fact: since the 1990’s, the S&P 500’s median 12-month gain after a first cut in a brand new cycle has been 11%. That kind of move off the 9/18/24 close would also take index to ~6,200 by next Fall.
Moving on to Takeaway #2 – There’s a lot of little stuff worth talking about right now… here are a few of the things that are jumping out on our high frequency indicators.
- Growth has been attempting to defend its leadership vs. Value once again, with the Growth/Value ratio within the R1000 settling into a tight back and forth range. Within the S&P 500, income/value-oriented sectors like REITs and Utilities have dominated in 3Q but growth-oriented sectors like Comm Services and Consumer Discretionary are starting to display some leadership again as the quarter starts to wind down.
- Our bottom line: a messy transition is leadership away from mega cap Growth appears to be underway, but we think it has the potential to stay messy for some time. We continue to see problematic positioning and valuation for the mega cap Growth trade…
- …but note that earnings sentiment (the rate of upward revisions) has been improving for the top 10 S&P 500 names relative to the rest of the index again.
- The Mag 7 also continues to display slight EPS growth superiority on consensus estimates relative to the S&P 500 ex Mag 7 despite a rapid deceleration in the former and reacceleration in the latter.
- On a related note, R2000 futures positioning on CFTC’s data hit a new post COVID high. This is an important, positive development for Small Caps (where net income growth is expected to surpass the Mag 7). Even though Fed cuts are a tailwind for this space, we still think Small Caps need a return of economic tailwinds to take positioning and valuation back to past peaks.
- Wrapping up, we still see signs that the S&P 500 is decoupling from Trump, but also see reasons to worry that the political uncertainty that usually proves troublesome for stocks short-term may not be over….
- We’re keeping an eye on betting market data on the balance of power. On Friday the scenario that had moved into 1st(by a miniscule margin) was Democratic President / Republican Senate / Democratic House, while the Republican sweep had faded to 2nd. These shifts stand in contrast with recent hedge fund conversations anticipating a Trump win.
That’s all for now. Thanks for listening, and be sure to reach out to your RBC representatives with any questions.