Welcome to RBC’s Markets in Motion podcast, recorded May 19th, 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 S&P 500 EPS backdrop has stabilized, but we still anticipate further downward revisions for 2025 S&P 500 EPS. After a preliminary model refresh, we are maintaining our 2025 S&P 500 EPS forecast of $258, which is below the bottom-up consensus of $265. Second, we’ve updated our S&P 500 valuation model to reflect updated RBC house views on key macro variables like interest rates and inflation. It suggests that last week’s gap up in the stock market was largely deserved, but that upside from here may be limited without another major step-up improvement in broader macro expectations. Third, we run through our thoughts on the Moody’s US debt downgrade from a US equity market perspective.
If you’d like to hear more, here’s another five minutes. While you’re waiting, a quick note that in a few weeks, voting in the 2025 Extel / Institutional Investor All America Research survey will be opening up. If you’ve found this podcast helpful, we’d appreciate your support in the Portfolio Strategy category again this year. Last year, we were honored to come in #3. Now, the details.
- Starting out with Takeaway #1: The S&P 500 EPS backdrop has stabilized, but we still anticipate further downward revisions for 2025.
- Over the past few weeks we’ve been highlighting how the earnings backdrop has stabilized, which has helped the US equity market find its footing. One example in our data: the rate of upward EPS estimate revisions hit 28.5% a few weeks ago, it’s typical non-crisis low, and is now up to 42%. Bottom-up consensus for S&P 500 EPS is also holding steady at $265.
- After a preliminary model refresh, we are maintaining our 2025 S&P 500 EPS forecast of $258, which is below that bottom-up consensus of $265.
- We refreshed our EPS model last week for the new changes published by RBC’s economists, and Rates and FX strategy teams. Key numbers were 1.2% annual real GDP, 3 Fed cuts, 10 year yield moving up initially then ending the year at 3.8%, and inflation in the upper 2’s. We also moderated our assumption for 2Q margin pressure. The exercise confirms $258 is still a reasonable expectation for the year.
- Beyond our modeling, history also points to the need for some downward revisions. Typically, the bottom-up consensus is cut by about 9% from the middle of the prior year – that would take 2025 to around $250. Importantly, cuts tend to be completed by the middle of the year in question.
- Moving on to Takeaway #2: We’ve also updated our S&P 500 valuation model to reflect updated RBC’s house views on key macro variables.
- It suggests that last week’s gap up in the stock market was largely deserved, but that upside from here may be limited without another major step-up improvement in broader macro expectations.
- Our trailing P/E model forecasts where the trailing P/E multiple for the index should be at year-end 2025 based on year-end assumptions for inflation, 10-year yields, and the Fed.
- The model is now calling for a trailing P/E of 22.2x at year-end 2025, which produces a fair value estimate of 5,730 for the price level when used in tandem with our refreshed $258 EPS forecast.
- The implied fair value level for the S&P 500 rises to 5,884 if we use the bottom-up consensus EPS forecast of $265.
- Looking at both numbers, this exercise leaves us feeling like the gap up in the S&P 500 at the beginning of last week made sense in the context of the latest US-China trade developments, which we see as reducing – but not eliminating – the headwinds to GDP growth and the tailwinds for inflation that have emerged since the start of the year.
- However, upside from here through year-end seems limited without another step-up improvement in expectations for the macro backdrop in the balance of the year and the stock market may be a little ahead of itself from a fundamental perspective.
- Wrapping up with Takeaway #3: how we’re thinking about the Moody’s debt downgrade from a US equity strategy perspective.
- There are really two issues in focus for us.
- First, we are watching reverberations in the bond market, specifically 10 year yields. Our earnings yield gap model has been in a favorable range for stocks for now, but will hit a level typically bad for stocks on a go-forward basis if 10 year yields hit 5.3%.
- Second, we see the Moody’s downgrade as part of a more broadly problematic shift in the market narrative that’s coming at a bad time. Post earnings, the stock market has been in need of a new catalyst to keep moving higher, and as discussed already we think stocks look fairly priced for the recent improvement in macro expectations. Last week, investors we spoke with were optimistic, starting to move beyond tariffs and focusing on the benefits of tax cuts and deregulation. Now’, we’re seeing headlines caught up in tariffs again, while the path of the tax bill has gotten complicated, and the Moody’s news has brought attention back to the country’s fiscal health and the sell America trade.
- Taking it all together, we wouldn’t be surprised to see the US equity market take a breather here.
- There are really two issues in focus for us.
That’s all for now. Thanks for listening. And be sure to reach out to your RBC representative with any questions.