Welcome to RBC’s Markets in Motion podcast, recorded April 14th, 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.
We’ve been busy seeing clients, reading and writing over the past week.
The three biggest things you need to know: First, the stock market is still experiencing a growth scare, in our view. Second, the process of resetting EPS expectations has begun and we run though key themes from the early reporters and companies that have presented at conferences since the Rose Garden. Third, we run through our latest thoughts on the Growth trade.
If you’d like to hear more, here’s another five minutes.
Starting With Takeaway #1, where are we are/have been the drawdown…the stock market is still experiencing a growth scare in our view.
- Last Tuesday the SPX was 18.9% below peak, basically touching the bottom of our 2nd tier of fear, which is a 14-20% drawdown similar to those of 2010, 2011, 2015-2016, and 2018.
- Those drawdowns were all driven by concerns about a recession or crisis that didn’t materialize.
- 2018 in particular is a good analogy in our minds – we had frothy positioning and valuation to start the year fueled by optimism on tax, a trade war, and concerns about policy error. That drawdown totaled 20%.
- If a recession is baked in, there’s more downside to for the S&P 500 to 4200-4500 in our view, in line with the median and average drawdowns of 27% and 32% since the 1930’s.
- For now, though the stock market does appear to be trying to stabilize in growth scare territory.
- What were we talking to clients about last week? We found that we kept highlighting how some milestones that we look for in major market bottoms have been achieved - AAII net bulls are already at crisis lows…
- …U Mich consumer sentiment is as bad as 2022,
- …Small cap P/E’s hit 12.6x last week in line with the lows of Sept 2022 and Oct 2023 and what we typically see in a recession.
- That being said, other indicators have not hit critical extremes yet – CFTC weekly US equity futures positioning is still early innings of falling…
- …NFIB sentiment for small businesses has weakened but has a lot more room to fall before hitting past lows…
- …and S&P 500 forward P/E’s are still well above average.
Moving on to Takeaway #2, the process of resetting EPS expectations has begun, and we have some early indications of what key themes in reporting season might be based on our transcript reading.
- The reset of EPS expectations needs to be done so investors can have faith in valuations. It’s another necessary milestone that needs to be achieved for stocks to put in a durable bottom.
- Here are some of the stats we track.
- The bottom-up consensus for the S&P 500 in 2025 has now fallen to $267 – still above our estimate of $258, but has finally started to move lower.
- Downward guidance has picked up, but isn’t seeing same spike yet as early last year; and we could see some companies suspend guidance.
- The rate of upward EPS estimate revisions has now fallen to 38% on the four-week average – in a non-crisis period we look for this to fall to 30%, in a crisis year we look for this to fall to 10-20%. Improvement on the rate of change on this metric is often a sign the performance bottom is in.
- On results – we do think they matter. Our stats show that companies beating consensus on EPS are outperforming in terms of immediate stock price reaction, while those that are missing consensus on EPS are underperforming.
- We’ve described reporting season as potentially like a box of chocolates – we don’t really know what we’re going to get.
- We’ve been reading earnings call transcripts for the early reporters along with conference transcripts for companies across the S&P 500 and Russell 3000 that have come in since the Rose Garden announcement. Some of the key themes so far are:
- On the overall outlook and macro backdrop, the big banks have highlighted a wait and see attitude among their customers, hesitancy and caution particularly when it comes to longer-term commitments, and the idea that smaller businesses and smaller corporates were more likely to be impacted by tariffs. On recession, views varied a bit but highlighted the growing risk of this outcome.
- Some banks also emphasized that it will take time for the reset in trade to play out and price into markets.
- Consumers were generally described as still healthy with differing views on the low end.
- The weight of the moment we find ourselves in within financial market history seemed to loom large. A number of companies found a reason to refer to a significant crisis from the past including 9/11, the GFC, and COVID. Most of the references emphasized their company’s strengths and/or ability to manage through. while some of the banks took the time to express confidence in the Fed.
- Tariffs were obviously the policy issue in focus, with some companies highlighting how they had already been moving out of China, had already diversified their supply chains, were already sourcing a lot locally, simply had low exposure, or were optimistic about negotiations. One Industrial company noted, however, that they had not found scale manufacturing capabilities to satisfy their needs in North America.
- Some companies were baking tariffs into guidance while others were not. Some noted they are not in a position to provide meaningful guidance until the policy settles out and that it will take time to understand the full implications. Overall, we did feel like the specificity from companies has improved.
- Some companies alluded to a pull forward of demand and inventory prebuilds, but not all. Most noted they would look at pricing to mitigate impacts.
- Overall, what we read left us of the opinion that recession is not a foregone conclusion, but that US equities are also not out of the woods.
Wrapping up with Takeaway #3: our thoughts on the Growth trade- it’s not clear cut right now.
- Growth has started to outperform Value again within Large Cap, and even before the announcement about the exemptions Friday night and Saturday, we’d been seeing a bit of outperformance by Tech within the S&P 500 since the Rose Garden.
- Our quant work suggests that Value no longer looks deeply undervalued vs. Growth, and that earnings revisions and forward EPS growth expectations are still a bit better in Growth than Value.
- With consensus GDP forecasts coming down, expectations for sluggish growth to recession are settling in which could be more of a pressure on EPS growth for the Value cohort.
- The big problem for Growth we see is that when we were seeing evidence of rotation from the US to Europe within the flow data, big cap Growth stocks were getting hit very hard.
That’s all for now. Thanks for listening. And be sure to reach out to your RBC representative with any questions.