Welcome to RBC’s Markets in Motion podcast, recorded February 10th, 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, the earnings backdrop has softened a bit on the stats for the broader US equity market, and has also justified the rotation in performance leadership that has been seen. Second, company commentary in last week’s earnings calls highlighted the uncertain optimism that is driving US equity market performance at the moment. Third, weakness in investor sentiment and a miss on consumer sentiment stand out in our high frequency updates last week. We continue to closely monitor the vibes whose anticipated strength has been an important part of the bullish thesis on the US equity market for 2025.
If you’d like to hear more, here’s another 6 minutes.
Starting with Takeaway #1: The Earnings Backdrop Remains Solid But Has Softened a Bit for the Broader Market, and Has Also Justified the Rotation in Performance Leadership That Has Been Seen
- Stocks that have reported have been behaving logically, with earnings beats outperforming in terms of immediate price action post results while misses are lagging. We think earnings has been the big driver of price action in recent weeks.
- There has been some softening in the aggregate, however. The rate of upward EPS estimate revisions for the S&P 500 as a whole has deteriorated slightly as reporting season has progressed, and now stands at just 40% upward revisions. In dollar terms, the bottom-up consensus now anticipates 2025 S&P 500 EPS to come in at just under $272, down from the $273 level that had been in place for a while.
- We don’t see a big spike in downward guidance as was the case a year ago. Last year, the S&P 500 seemed to benefit from an effort by companies to keep sell-side and investor expectations low, and earnings forecasts for 2024 stayed relatively stable, but we don’t see the same setup for 2025.
- On positioning, the rotation in leadership within Large Cap and stabilization of Small vs. Large that we’ve seen in terms of performance makes sense in the context of recent earnings revisions trends – the rate of upward revisions to analysts’ forecasts has been better in Small than Large. The biggest names and Growth stocks are still better than the rest of the market and Value stocks on this metric, but the top 10 names and Growth stocks have become far less dominant.
Moving on to Takeaway #2: What we learned from company commentary last week in our earnings call transcript reading… in a nutshell, the optimism that’s been in place in the C suite has been dented by uncertainty.
- The concept of uncertain optimism has been in place throughout reporting season in company commentary and that remained the case last week… but early on companies were more prone to dwell on the optimism. Last week the pendulum seemed to swing a little more in the direction of uncertainty.
- Descriptions of the macro backdrop included fluid, cautious, uncertainty, sluggish, softer, challenging, and evolving. Specific issues cited included interest rates, inflationary pressures, trade policy, the LA fires, weather, tougher comps, the stronger US dollar and currency volatility, and inventory challenges. At the same time, companies referred to optimism, confidence, a healthy job market, solid fundamentals, improvement in the ISM manufacturing index, and strong M&A pipelines, while a number also referred to the idea of improvement in the 2ndhalf of the year.
- We aren’t getting a lot of color on the consumer yet and expect to learn more here in coming weeks when more of these companies report. Last week, we saw old themes reiterated for the most part once again. Companies referred to the consumer as steady, value-seeking, resilient, and stabilizing, alongside caution on the lower end. High interest rates/mortgage rates were highlighted by several companies. One company comment that stood out was that “continuously hitting the consumer over the head with price is not winning.” Another, from a hotel companies, was that policy uncertainty may be causing consumers to be a little more tepid.
- Government policy was highly in focus. Besides tariffs and trade, issues discussed included a little bit on taxes, optimism around regulation, uncertainty regarding the DC office market, federal end market/spending uncertainty, the puts and takes and potential opportunities seen for DOGE, views on the new leaders in the health agencies, uncertainty emanating from the freeze on foreign aid, and thoughts on immigration. One of the most colorful quotes that we read last week came from an industrial company that compared navigating the current policy backdrop to riding Space Mountain at Disney World.
- Tariffs were obviously in focus as well. While a number of companies emphasized that the situation was still fluid and evolving, there was more of a willingness to provide specific numbers, and to talk about Mexico and Canada (instead of only China), compared to what we saw earlier on in reporting season or last November’s conference season. Some companies are starting to bake tariffs into their guidance, while others are not doing so yet. Some emphasized that their Mexico and/or Canadian exposure was low, and we came away with the impression that for some the China tariffs are more meaningful. Some companies with more significant exposure emphasized that they would be passing through the cost. Companies generally emphasized their planning efforts that are underway and their track records at managing through this kind of situation. One auto companies noted that a few weeks of tariffs would be manageable for them but that more protracted tariffs would be highly problematic.
- Not surprisingly, companies throughout a number of different industries and sectors spent time walking investors through the headwinds they have been experiencing from a stronger US dollar. Some companies were starting to bake further impacts into their guidance, with one company reminding analysts to adjust their models. One company describe recent currency volatility as a torture test.
Wrapping up with Takeaway #3: A quick update on the post-election vibes – the signals are mixed.
- Our earnings call transcript analysis tells us that corporate vibes have taken a bit.
- Meanwhile, investor vibes are weakening. Net bulls in the weekly AAII retail investor sentiment survey came in at -9.6% on the weekly unadjusted data point and are sitting in slightly negative territory (-1%) on the four-week average. While the weekly data point is now in excess of one standard deviation below the long-term average, we’d like to see a similar move in the four-week average before contemplating the possibility that investors have gotten too pessimistic.
- Consumer vibes are stalling. A weaker-than-expected reading for the University of Michigan consumer sentiment index rattled stocks on Friday. That weak print echoes the weak reading from the Conference Board gauge for January that was reported a week earlier.
- Last week’s weak Michigan print was accompanied by a surge in near-term inflation expectations, …
- …and was seen rather broadly across cohorts in a number of categories including income, gender, education, and partisanship.
- All that being said, the political vibes are strong. The President’s net favorability has been improving and is back in positive territory. It has also been loosely aligned with trends in S&P 500 performance, similar to the way Trump’s polling data became correlated with US equity market performance prior to the election.
- Views on the direction of the country in polling data have also moved up sharply. This has occurred despite the pick-up in policy uncertainty for economic policy, regulation, monetary policy, fiscal policy, taxes, government spending, trade, entitlement programs, and health care.
That’s all for now. Thanks for listening. And be sure to reach out to your RBC representative with any questions.