RBC's Markets in Motion

The big things you need to know: First, we’ve done some housekeeping on our S&P 500 EPS estimates for 2024 and 2025, resulting in very modest changes. Second, we highlight the two things we’re paying the most attention to in reporting season – specifically, qualitative color from companies on hot macro topics and whether mega cap Growth can maintain its earnings dominance. Third, we highlight what else jumps out from our high frequency indicators on sentiment and the US election.

Two big things you need to know: First, globally our analysts are generally constructive on performance, valuations and interest rates, with Materials most in favor and Consumer Staples most out of favor across all of the questions we asked. Second, within the US we are reiterating our overweights on Financials and Materials, upgrading Health Care to overweight, and downgrading Utilities to market weight. Energy remains a tactical overweight but goes on downgrade watch.

The big thing you need to know: Small Caps got a boost from the better-than-expected jobs report on Friday, reinforcing our belief that a return of economic tailwinds is the catalyst they need to take valuation and positioning to the next level.

Three big things you need to know: First, our survey results, which are bottom-up in nature and driven by domestic policy views, imply that the event is relevant to US equity markets, but perhaps less so than some market participants may believe. For our US analysts, a Republican sweep was seen as the most bullish outcome, while a Democratic sweep was seen as the most bearish outcome, but the key thing to note is that the tilts were extremely mild. Second, some of the traditional Trump trades continue to emerge in policy assessments and sector views. Among our US analysts, Energy and Financials had some of the most bullish tilts in a Republican sweep scenario, and some of the most bearish tilts in a Democratic sweep scenario. Third, in terms of our own broader market call, we’ve viewed the elections as creating near-term uncertainty in the US equity market and the potential for some short-term choppiness, but the survey results add to our growing belief that the thing that may matter most for US equities (for 2024) is getting past the event so companies and investors know what they are dealing with.

Two big things you need to know: First, valuations continue to look full for 2024 on the S&P 500, but our model argues for upside in 2025. Second, there’s a lot of little stuff to talk about right now. We run a few of the key updates on our high frequency indicators including those on the rotation trade, small caps, and the election.

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.