If you’d like to hear more, here’s another 10 minutes – we’re a little longer than usual this week as the podcast will be taking a break next week for Thanksgiving. As always, while you’re waiting a quick reminder that you can subscribe to this podcast on Apple, Spotify and other major platforms.

Now, the details.

Starting with Takeaway #1: We generally see last week’s cooler than expected CPI print as constructive for US equities, with some caveats.

• What we like is that the deceleration in inflation that many equity investors have been expecting and hoping for finally materialized. In our view, the chances have improved a bit that the Fed will end hikes sooner rather than later (our house view is for the last hike in March) and that a short shallow, near-term recession, rather than a deeper/longer-term one, will occur.

• One thing we don’t like is that the S&P 500 has lost its valuation appeal again. Following last week’s bounce, S&P 500 P/Es are near average on consensus EPS and a bit above average on RBC’s EPS forecasts – not frothy but lacking the appeal we had started to see around the October lows.

• We also don’t like the potential for hawkish Fed rhetoric to make a comeback to keep financial conditions from getting too loose. We’ve already gotten a flavor of that from Waller. More hawkish rhetoric, even in the context of a debate between hawks and doves, likely adds to stock market volatility in the months ahead.

• What moderating inflation means for US equities broadly is a complicated affair, given that inflation expectations are still generally elevated relative to history despite coming down a bit.

• Similarly, positioning in US equities in US households seems likely to come under pressure as inflation moderates, but a higher-than-expected run rate may provide something of a buffer. On page 6, we highlight how US equities as a percent of total financial assets (net of cash and bonds) tend to track CPI. Moderating inflation seems likely to be accompanied by lower US equity exposure, but higher levels of inflation relative to recent history may serve to prop that positioning up if that is what ends up occurring.

Moving on to Takeaway #2: We see the midterm results ass good for stocks, but we’re just not as excited as everyone else seems to be.

• As of Tuesday morning, the Senate was projected to stay under Democratic control. House control had not yet been called though the Republicans still appeared to have a slight edge there. NBC News was projecting that Republicans would win 220 House seats vs. 215 for Democrats. Although Republicans underperformed expectations and got a red ripple rather than a red wave, for now the market still appears to have gotten the divided government it wanted.

• What does this mean for stocks going forward in the near term? If Republicans don’t end up taking the House, we see it as a negative stock market event in the short term.

• Longer term (i.e., into 2023), we see the results of the midterms as supportive of the stock market. The S&P 500 has risen 14% on average under a Democratic President and split Congress. Further spending packages seem unlikely which could be seen by market participants as adding to the United States’ inflation problem.

• But we also find ourselves thinking that the bullish narrative on the longer-term implications has been a little oversimplified and overstated in recent days. In our investor meetings last week, one thing that we kept pointing out was that in three of the past four midterm election years, the stock market has rallied in the fourth quarter but has only seen flattish/mildly positive returns the following year. The more the stock market rallies after this midterm in the fourth quarter, the more we will worry that investors are borrowing against 2023’s potential gains.

Wrapping up with takeaway #3 on 3Q22 reporting season. The earnings backdrop is softening, though the sharp cuts investors have wanted still haven’t materialized, with relative strength in Energy and Small Caps, and relative weakness in Communication Services.

• 70% of S&P 500 companies are beating consensus EPS and sales, weaker than recent quarters. Small Caps are not quite as strong as Large Cap (60% are beating on EPS, 63% on revenue) but have a better trend as their stats are stable vs. past quarters.

• While we still think 2023 numbers need to come down for the S&P 500, keeping stocks volatile, the good news is that stocks tend to bottom 3-6 months before EPS revisions stop falling.

• At the sector level, Energy is seeing the most EPS beats in the S&P 500, while Technology is seeing the most EPS beats in the Russell 2000. Communication Services and Materials beat rates are low vs. other sectors in both indices.

• Within the R2000, EPS beats have been most rewarded in Financials and Energy, while misses have been hit hardest in Communication Services and Technology.

• In percentage terms, 2023 EPS, revenue, and margin forecasts have been coming down for most S&P 500 sectors.

• For 3Q22, trends have been mixed by sector on EPS and revenue forecasts, with Consumer Staples, Energy, Health Care, and Utilities all moving up a little on both.

That’s all for now. Thanks for listening. And be sure to check out RBC’s new macro podcast, Macro Minutes, for thoughts from RBC’s team of strategists and analysts in rates, economics, FX, equities and other areas.