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.
If you’d like to hear more, here’s another 6 minutes.
Takeaway #1: Earnings Season Has Been Fine So Far on the Stats, Our Reading Has Kept Us in the Tired Goldilocks Camp
for:
The key themes in 2Q24 earnings call transcripts are still emerging but overall what we’re reading is keeping us in the “tired goldilocks” camp. Companies we’ve been reading have been highlighting a strong and stable backdrop and resilient consumers despite pressures from higher rates and inflation. Labor and cost pressures remain in focus. Commentary on international markets has been mixed. The Fed has been in focus, particularly the pressures emanating from higher interest rates. Uncertainty associated with the US election has been a bigger discussion point than the past.
Moving on to Takeaway #2: The Rotation Trade Still Has Some Room, Though We’re Mindful of Headfakes as some of our indicators are back to levels where the trade stalled out at last time. Whether This Is a Durable Leadership Transition Also Remains to Be Seen.
Here’s a rundown on what we’re watching:
First, we’ve been watching earnings sentiment (upward revisions trends) for a shift that would support further rotation in market leadership in the short term, but haven’t seen it yet. Despite the challenging news flow from the first few mega cap growth names that reported, the rate of upward EPS estimate revisions for the top 10 names in the S&P 500 remains much higher than the rest of the index.
The Russell:
net income growth contract in:
Third, positioning. It’s started to move but has more room to go for Mega Cap Growth and Small Cap. CFTC positioning data for Nasdaq 100 futures has started to slip from levels in line with February’s peak, but the decline has been modest so far.
ve seen more of a shift in R:
Fourth, valuation. Not too much change here recently. The top 10 S&P 500 names are still trading at a median forward P/E of 30x (a ceiling they’ve had trouble breaking through), while the rest of the S&P 500 remains at a median P/E of 17x (a little above average but well below prior peaks).
Meanwhile, the Russell:
Fifth, flows. In recent weeks, equity funds flows data has been highlighting a shift away from Growth and Tech, alongside a shift into Value, Small Cap, Industrials, Materials/Commodities and Financials.
There were some hints of stabilization in Growth and Tech flows in last week’s update…
…and a little slippage in Value, Financials and Materials that we’ll be keeping an eye on. Bottom line – flows have been a tailwind for rotation but we are monitoring them for signs of a stall.
Fed cutting cycle, similar to:
Wrapping up with Takeaway #3: Individual Investor Sentiment Takes a Hit, While US Equity Flows Remain Strong, Keeping Us on Guard For an End to the Pullback
The current pullback in the S&P 500 has been -4.7% from recent highs at the closing low, not quite as bad as the April pullback but getting close.
We’ve gotten some relief on our sentiment work. AAII net bullishness fell to 11.5% as of 7/25/24, taking its 4-week average to 21.0%. This stat is no longer more than one standard deviation above the long-term average on the 4-week average, as was the case in last week’s update. This is good news for US equities, as stocks often stumble after hitting that one standard deviation mark on the 4-week average. We’ll be keeping a close eye on this data in coming weeks to see if optimism gets extended again or remains subdued.
Politics remain a challenge. The S&P 500 has generally continued to track expectations that Trump will win the White House in betting markets. Trump showed some signs of stabilization in certain betting markets/averages toward the very end of last week. But zooming out, Trump’s lead in betting markets has been narrowing. Interestingly, polling on the generic congressional ballot also tightened up over the weekend. We see the election as a source of uncertainty for the US equity market in coming months that could deepen the pullback, but note that pullbacks in presidential election years are normal.
That’s all for now. Thanks for listening. And be sure to reach out to your RBC representative with any questions.
