RBC's Markets in Motion

The big things you need to know:

• First, we are modestly revising our YE 2025 S&P 500 price target, taking it up 3% to 5,730 from 5,550. Our valuation and earnings models drive this number.
• Second, we view sentiment as the main risk to our call. Even though it’s been melting up in recent weeks, our sentiment model (based on AAII net bulls) is still the most constructive one in our price target toolkit, and our analysis of S&P 500 moves off the lows of the major post GFC drawdowns indicates that the index could have more room to run through year-end 2025.
• Third, we review the case for and against Small Caps, which were in focus in our meetings last week. We remain neutral as Small Caps have been derisked to a greater degree than Large Caps, making an underweight unwise, but the conditions for outperformance seem elusive.

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.

The big things you need to know:

• First, it was another week of stabilization on the earnings stats we track, helping to support the recent stabilization in equity market pricing.
• Second, there was a little less conversation about tariffs in last week’s earnings calls, which left some additional room for discussions on the health of the consumer and the impacts of non-tariff policy changes.
• Third, in our other weekly updates, the thing that jumps out is that when we bake in current consensus assumptions on key macro variables and bottom-up EPS for 2025, the S&P 500 ended the week roughly in line with where our model says fair value for the index should be at year-end.

The big things you need to know:

• First, earnings sentiment has stabilized a bit, helping stock prices find some footing for the moment.
• Second, we run through our thoughts on what we learned from last week’s earnings calls. We think there are two different perspectives at play on the consumer, which may be adding to investor confusion. We exited the week seeing managing tariff impacts as a work in progress, but with a greater appreciation of the work that has been done.

The big things you need to know:

• First, earnings sentiment is at an important crossroads, with the rate of upward EPS estimate revisions having fallen to 30%.
• Second, what we read in S&P 500 earnings call transcripts last week keeps us in the camp that recession is not a foregone conclusion, makes us concerned that any adverse impacts from tariffs may be felt a little later in the year or even next year, and pushes us toward the idea that the consumer is holding up but still hasn’t been unscathed.
• Third, the idea that investors are rotating out of the US assets into other geographies is supported by recent funds flows data.

The big things you need to know:

First, the stock market is still experiencing a growth scare, in our view, where it is attempting to stabilize. We see more downside if recession is priced in.

Second, we review how the process of resetting EPS expectations has begun, and run though key themes from the early reporters and companies that have presented at conferences since the Rose Garden. Our overarching takeaway from our reading is that recession is not yet a foregone conclusion but also that US equities are not out of the woods.

Third, we run through our latest thoughts on the Growth trade, which has been outperforming again, and note that it is not a clear cut call.

The big things you need to know:

• First, shortly after midnight on Friday morning, we cut our S&P 500 EPS forecast for 2025 to $258 and our YE 2025 price target to 5,550 – the price target cut was something we’d been telegraphing we’d do if the drawdown in the index broke 10% from peak for quite some time, which it did on Thursday.
• Second, as the stock market has continued to gap down, we’ve continued to highlight our tiers of fear framework for how far US equities could decline in different scenarios. We see the index falling as low as 4,900 if this remains a growth scare, but a drop to 4,200-4,500 is a reasonable way to think about where the index could fall if a recession is priced in.
• Third, our weekly valuation and flows updates provided us with some insight into why US equity markets have been gapping down so severely.

The big things you need to know:

• The team tackles some of the top questions in consumer-related conversations today, including what their company and industry level interactions and data have been telling them about the current state of the consumer, whether the consumer has been retreating or simply shifting their spend, what's happening in different consumer cohorts, what they think the biggest challenges are for the consumer at the moment, and how their companies are managing around tariffs.
• Overall, the team comes to the conclusion that while many of the issues impacting the consumer aren't new, in the aggregate the current set of pressures feels different and conditions appear to have taken a turn for the worse. Nik notes that the tone at a recent industry event was the most downbeat of all of the year's he's been attending and highlights what he believes the incremental pressures are this year. Mike highlights how his proprietary pricing data was particularly weak in February and how weakness in housing has broadened regionally. Steve points out that many issues have been used to explain consumer weakness earlier this year (i.e. weather), but that the slowing that's been underway has persisted even with some of those things now in the rearview mirror.
• On policy, all three noted that their companies have provided very little in the way of guidance related to tariffs, which will likely lead to a tricky reporting season. The team explores whether the companies in their industry will be able to pass along tariff costs via pricing, collectively concluding that it may vary by industry and will be very difficult to do in certain verticals.

The big things you need to know:

• First, trends in investor vibes were mixed last week, both in our quant work as well as last week’s investor conversations.
• Second, the median forward P/E for the S&P 500 has fallen sharply but remains well above average. We’ve also not yet seen significant adjustments to consensus EPS forecasts, which seems likely to keep confidence in P/E analysis low for now.
• Third, Small Caps (which have seen a greater degree of valuation correction) have continued to outperform Large Caps.

The big things you need to know:

• We’ve lowered our YE 2025 S&P 500 price target to 6,200 from 6,600,
• We’ve lowered our 2025 S&P 500 EPS forecast to $264 from $271.
• Among other adjustments, our new price target and EPS forecast embed the updated views of RBC’s Economics and Rates strategy team which were released last week.
• We have updated our year-end 2025 bear case for the S&P 500, which we’ve lowered from 5,775 to 5,550.
• Fourth, some of the vibes we've been tracking are starting to look too extreme to us (in terms of their negativity), but others have more room to go lower.