RBC's Markets in Motion

Two big things you need to know: First, a few things (besides renewed optimism over a 50 bps cut) went right for Small Caps last week. Second, we highlight our current, top-down US equity market read throughs from the domestic policy platforms of the Harris and Trump campaigns. The longer-term signal their platforms are sending is more interesting to us than the noise around any shorter-term policy related sector trades.

Welcome to RBC’s Markets in Motion podcast, recorded September 9th, 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.

Three big things you need to know:

First, Friday’s jobs report added to investors’ uncertainty regarding the labor market, but the data point that concerned us from last week was the spike in Tech layoffs in the Challenger report.

Second, election uncertainty has persisted with policy getting greater attention from both sides. We run through our US equity market read throughs from Trump’s economic speech last week.

Third, in our discussion of other updates from our high frequency indicators, we review what we’re watching in terms of potential near-term downside levels for the S&P 500, sentiment, and the Semis trade.

If you’d like to hear more, here’s another 6 minutes. Now, let’s jump into the details.

Starting with Takeaway #1: Employment Uncertainty Has Grown After Friday’s Jobs Report, But The Spike In Tech Layoffs In The Challenger Report Spooked Us The Most Regarding Stocks

• RBC’s economics team noted that while the report “doesn’t point to a sharp contraction in the labor market, it also gave no indications that the broader cooling trend – which is not welcomed by the Federal Reserve – has in any way run its course.”  From our seat in US equity strategy, we generally agree with the idea that the jobs report is still consistent with cooling and normalization as opposed to an economy on the cusp of recession.
• That being said, we were a little spooked by some of the details in the Challenger layoff report that came out earlier in the week. The overall level of layoffs moved up in August, but remained well below the spikes associated with past recessions, and was even a bit below the moves higher seen in 2023-2024 and 2015.
• What caught our attention was the spike in layoffs for Technology companies which wasn’t as bad as those seen in late 2022 and early 2023, but otherwise rivals some of the worst spikes this industry has seen over time. This primarily worries us in regards to the Tech sector itself and the broader market by way of the rotation trade. Though layoff announcements moved up slightly in a few other industries, those were generally mild relative to history.

Moving on to Takeaway #2: Election Uncertainty Persists, With Policy Getting Greater Attention

• We continue to see the US election as a key challenge that the US equity market will need to work through in coming months, due to the uncertainty that the event has injected into the outlook. We do usually see a pullback in the S&P 500 in September and October of Presidential election years, with a rebound afterwards.
• Thinking about today specifically, a number of companies referred to this idea that the election has injected some uncertainty into the outlook in their recent earnings calls.
• Meanwhile, Harris has pulled ahead of Trump in the PredictIt betting market and RCP polling average, but the race still looks quite close on these data sets, as well as in the polling for the swing states.
• We do believe the stock market has been paying attention to the event given the alignment we’ve continued to see between S&P 500 performance and expectations that Trump will win in betting markets.
• One of the primary things the stock market cares about regarding the election is domestic policy, and investors have been getting new information on the policy leanings of both Harris and Trump over the past few weeks. In our latest report, we’ve recapped our early thoughts on the stock market read throughs of Trump’s domestic policy agenda as described in his speech to the Economic Club of New York last week. We think it’s premature to put on any significant sector or industry trades based on the domestic policy ideas being by either candidate, discussed particularly since we expect Congress to be split leaving little room for major news laws. Nevertheless, a few things jumped out to us:
• First, Trump’s linking of a lower corporate tax rate of 15% to domestic production was something we hadn’t heard before, and we confess that we aren’t entirely sure what companies would be eligible for the lower corporate tax rate Trump discussed after Thursday’s speech or how the S&P 500 would be impacted in terms of profitability. If we were to take down the effective tax rate by 6% in our S&P 500 earnings model for 2025, to approximate the Trump proposal, we estimate that our 2025 S&P 500 EPS forecast could rise by more than 7%. After Thursday’s speech, however, we no longer think that’s the right way to think about the math as we suspect different companies, industries, and sectors could be impacted differently.
• Second, Thursday’s speech gave us a better sense of which sectors and industries we should be watching closely from a Trump perspective.
• Industrials and Materials remain obvious ones to monitor given Trump’s attention to the manufacturing economy, rescinding unspent IRA money, and tariffs, which got a lot of attention in the speech.
• Others include Energy - even though we knew this issue was in focus for Trump, we were still surprised by the emphasis on expanding production in his remarks.
• Homebuilders - we found the comments he made on expanding housing affordability and supply interesting given the focus on the issue by Harris recently,
• Tech/AI and Utilities -  we found Trump’s comments on the US needing to dominate AI and the need for more electricity to make it happen noteworthy.
• Health Care also jumped out to us, but because it was barely mentioned throughout the speech, suggesting to us that it’s not a high priority.
• Similarly, even though Financials has tended to be viewed as a Trump trade, it is worth noting that there was also virtually no discussion of this sector that we can recall in his speech on Thursday, aside from the potential link to the broad desire for deregulation.

Tuesday’s debate provides an opportunity for investors to get more insights into both candidates’ domestic policy agendas, but only if the moderators choose to dig in there.

Wrapping up with Takeaway #3: What Else Jumps Out From Our High Frequency Indicators

• The decline in the S&P 500 so far in September of 4.25% is right in line with the five-year average full month return for the index in September, and the full month September decline in the index in 2023.
• If the September pullback in the S&P 500 continues, we’ll be keeping a close eye on the index around the 5,100 level, which would represent a 10% drawdown from the July high and decline in percentage terms similar to what was experienced in Fall 2023 . We see scope for further downside, or at least choppiness, in the near-term given the five big pressures we’ve been highlighting for US equities seasonality, sentiment, the election, the typical market volatility around rate cuts, and rotation. For now, we still think any further damage would be contained within a 10% garden variety pullback range. But if hard landing fears continue to escalate, the risk of a growth scare decline in the 14-20% range, similar to 2010, 2011, 2015-2016, and 2018, will also admittedly rise.
• REITs, Utilities, Staples and Financials are outperforming the most within the S&P 500 so far in 3Q24, followed by Health Care. These represent classic defensive parts of the US equity market, along with a big pocket of cyclical value. Other than the fact that these are natural beneficiaries of the rotation out of mega cap Growth names, two things jump out to us about these sectors.
• First, Financials is an area that has almost always outperformed in the 2nd half of Presidential election years within both Large Cap and Small cap.
• Second, most of these classic defensives (ex REITs) tend to outperform following first Fed rate cuts.
• We were surprised to see that investor sentiment and positioning got even more stretched last week. The four-week average for AAII net bulls rose to 21.5% (barely below the 1 standard deviation mark) after the weekly data point came in at 20.4% (page 30).
• Lastly, we’re keeping an eye out for opportunities in some of the parts of the US equity market that are getting hit hard right now. One of these that we’re watching closely is the Semis & Semi Equipment industry. Despite the pain that’s been inflicted on this space, it still looks problematic on our industry work. Valuations for the median stock in this industry in the Russell 3000 remain elevated, and earnings revisions trends remain negative.

That’s all for now. Thanks for listening. And be sure to reach out to your RBC representative with any questions.

Two big things you need to know: First, as we return from the Labor Day holiday weekend in the US, we find that major challenges for US equities are still lurking. We remain confident in our 5,700 YE 2024 S&P 500 price target, but acknowledge the challenges that must be worked through. Second, other updates from our high frequency indicators keep us in the camp that believes the US economy is slowing but isn’t on the cusp of an outright downturn. Overall, we continue to take comfort in earnings and economic data.

The big things you need to know: First, 2Q24 earnings season is ending up solid. With most reports in, we highlight a few of the most interesting charts in our deck on earnings right now. Second, other updates on our high frequency indicators were generally positive for US equities and mixed for the rotation trade. We end the summer of 2024 with increased conviction that August 5th was the low in the recent pullback, even if some choppiness seems likely to be there to greet us when we return in September, and feeling good about our 5,700 YE 2024 S&P 500 price target.

Three big things you need to know: First, last week’s price action relieved some pressures on the stock market, but didn’t solve its major problems. Second, earnings remain solid with no major deterioration in corporate tone. Third, we’d be more selective with value-oriented defensive sectors going forward.

Three big things you need to know: First, earnings season has been fine so far, and what we’ve read has kept us in the “tired goldilocks” camp. Second, we run through the latest updates for the indicators we’re monitoring in the rotation trade. We are mindful of headfakes, but think the trade may still have some room to run in the short term. We also still think whether a durable multi-year leadership transition is underway remains to be seen. Third, individual investor sentiment took a big hit last week per the AAII survey, while US equity flows have remained strong, keeping us on guard for an end to the current pullback.

Four big things you need to know: First, investor sentiment has gotten as extreme as it did last August and this past March. Second, earnings season is off to a solid start, but we are still looking for some additional evidence in support of the idea that we’re seeing a durable leadership shift rather than a short-term rotation trade. Third, we’ve been monitoring our other high frequency indicators for clues on the rotation trade. Some suggest the rotation trade has room to run but others are less clear. Fourth, we highlight what we’re watching in the equity market regarding the US election and our initial thoughts on how Biden’s decision to withdraw may impact US equities.

Two big things you need to know: First, we see 2Q24 reporting season as a key test for the rotation trade that attempted to start up again last week. Second, we remain worried about a pullback in the S&P 500 given the latest developments on our sentiment and positioning work, but timing seems a bit more complicated due to last week’s CPI print and surge in optimism on Fed cuts.

Three big things you need to know: First, we are lifting our YE 2024 S&P 500 price target to 5,700 from 5,300, which we would characterize as a nervous raise. Second, we think the risks of a short-term pullback in the S&P 500 are growing, similar to what occurred in April. Third, on positioning, we think it will be tough for the US equity market to see a sustainable leadership transition away from mega cap Growth until we are through the economic soft patch.

Three big things you need to know: First, the Duke CFO survey highlights how C-Suite confidence has remained steady, with monetary policy and automation in focus. Second, our new valuation stress test suggests the S&P 500 has been baking in optimistic views on inflation, interest rates, and the Fed. Third, recent funds flow trends point to a lingering desire for a shift in market leadership.