Takeaway #1
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.
“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.”
Lori Calvasina, Head of US Equity Strategy, RBC Capital Markets
Takeaway #2
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.
- 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.
Takeaway #3
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.
