This week the podcast back to tackling hot topics and the most interesting things that crossed our desk last week. Three big things you need to know:
• First, corporate confidence, capex, and balance sheets were all new topics in focus in our investor meetings last week.
• Second, things that jumped out in our high frequency indicators included one of our main sentiment indicators starting to look more stretched, stabilization in Biden’s polling numbers, and strengthening in US equity funds flows – which collectively illustrate how the near-term outlook for the US equity market has gotten a bit murkier.
• Third, we highlight our initial thoughts on the weekend’s developments in Russia from a US equity market perspective.
If you’d like to hear more, here’s another 6 minutes. While you’re waiting a quick reminder that if you’ve found this podcast and our research helpful, we’d appreciate you’re support in this year’s Institutional Investor survey in the Portfolio Strategy category. This is a competitive category where the analysts are tightly bunched, and every vote counts. Voting is still open for those with ballots until June 27th.
Now, jumping into today’s details.
Takeaway #1: Corporate Confidence, Capex, and Balance Sheets were all In Focus In our meetings last week
• Corporate confidence came up in discussions about why margins have been so resilient. We highlighted the higher degree of confidence in the Duke CFO survey the outlook for their own companies relative to the economy. We think this reflects the ability of management teams to navigate a crisis, something that’s tough to quantify in an EPS model.
• On capex, investors are concerned about a fall-off in activity given recent declines in ISM new orders.
o We pointed out that capex expectations in the regional Fed surveys have been pointing to weakness as well, though a few are showing some signs of possible stabilization.
% of Russell:
o We also noted that interest expense has been at the low end of its historical range relative to sales in the S&P 500.
o Additionally, we pointed out that while debt is high relative to EBITDA in the S&P 500…
, especially if cuts begin in:
Moving on to Takeaway #2: The things that jumped out on our high frequency indicators collectively highlight the murkier, intermediate-term outlook for the stock market.
• The first of these is sentiment, which doesn’t look too stretched just yet but has gotten closer to worrisome territory. AAII hit 15% net bulls on the 4-week average in last week’s update. When this indicator hits 30%, the S&P 500 has only been higher 12 months later 45% of the time with an average gain of 1.2%. As discussed last week, the recovery in this indicator off the extremely bearish levels seen to start the year (and until recently) has been one of the things keeping us in the consatructive camp. But this rationale has faded.
• Second, Biden has stabilized, while DeSantis has lost momentum. While the debt ceiling drama was unfolding disapproval numbers for Biden and optimism on DeSantis had both risen, stock market friendly developments. But both trends have reversed a bit recently, with Biden’s disapproval starting to turn lower in the polls…
o … and DeSantis showing a loss of momentum in betting markets.
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• Third, US equity funds flows are turning positive. Weekly data from EPFR suggests that US equity funds have started to see inflows even while inflows to bond funds remain intact.
o The shift into US equity funds seems to be more about geography than asset classes, as flows to European funds have shifted from positive to negative, and inflows to China and Emerging Markets have weakened. Canada and Japan flows look more like trends in the US, with Canadian flows turning slightly positive again and Japan inflows gaining strength.
o Digging down within the US, flows to Growth funds have been strong but appear to be losing some momentum. Meanwhile, flows to Value funds have started to get less negative but haven’t shifted positive.
Wrapping up with Takeaway #3: Our Quick Take On The Weekend’s Developments In Russia From A US Equity Market Perspective
• We consulted with Helima Croft who runs our commodity strategy team for her expert view.
• From a US equity strategy perspective, a few things jump out from her comments. First, Helima observes “the risk of further civil unrest in Russia now must be factored into our oil analysis for the back half of the year.” We’ve sensed interest in the Energy sector in our client meetings in recent months have been pointing out that the sector appears undervalued…
• is a good source of dividend yield, and that earnings revisions have improved a bit recently. The sector has been underperforming, and we wouldn’t be surprised to see the weekend’s events cause generalists to take another look at it in coming days.
• Second, Helima points out that “there appears to be great uncertainty about what comes next” and “that the next few weeks will likely be crucial” for determining Putin’s fate. Given this, we think it’s too early to draw any major investment conclusions and expect to learn more relevant details in the coming days and weeks. The initial lack of reaction in US equities makes sense to us in this context.
• That being said, it is worth noting that this ratcheting up of geopolitical angst is coming at a time when one of our sentiment indicators is starting to approach worrisome territory and stocks are entering a time of year that has a bad reputation in terms of seasonality. With the debt ceiling behind us and Fed fears struggling to keep the spotlight, the stock market has seemed like it has been searching for a new narrative to latch on to. And this new chapter in the Russia/Ukraine war is one that, in the intermediate term at least, seems likely to keep investors nervous.
That’s all for now. Thanks for listening. And be sure to reach out to your RBC representative with any questions.
