Welcome to RBC’s Markets In Motion podcast, 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, Energy has been a top S&P 500 sector since January. We like its attractive valuations, improving funds flows, and role as an inflation hedge in our overweights. Second, Large Caps are starting to look a little better than Small Caps on a few of the earnings-related metrics that we track, suggesting to us that Small Caps’ sluggish performance of late isn’t all about Fed and inflation fears. Third, sentiment continued to slip on one of our main sentiment models from elevated levels.
If you’d like to hear more, here’s another five minutes.
ntial Women in US Finance for:
Now let’s jump into the details.
Starting with takeaway #1: Energy has been one of the best sectors in the S&P 500 since January.
One of the charts that caught our eye in our end-of-week updates highlights how Materials, Energy and Industrials have been the best-performing S&P 500 sectors since the end of January.
As such, we’ve been revisiting our Energy overweight in conversations. That call has been driven by our work showing that the sector’s valuations are attractive within the S&P 500, constructive views from our research analysts who cover the space relative to our teams in other sectors, and our sense that the sector is a useful inflation hedge in our portfolio.
-year Treasury yields since:
Interestingly, our funds flow data also highlights how Energy, Industrials, and Materials/Commodities dedicated funds are all seeing improving trends in funds flows in recent weeks.
Moving on to takeaway #2: Large Caps are starting to look a little better than Small Caps on a few of the earnings-related metrics that we track. While we think it’s still fair to say that Small Cap performance has stabilized relative to Large Cap, the outperformance that Small Caps enjoyed in November and December of last year and most of February has dissipated again.
In part, we think this is due to renewed fears over inflation and when/if the Fed will cut rates since cuts tend to be a trigger for Small Cap outperformance.
and Russell:
There’s no one sector driving this, as most Russell 2000 sectors are in negative EPS revisions territory at the moment.
Within the S&P 500, most sectors are in positive EPS revisions territory or are seeing a balance between upward and downward revisions.
Second, the downgrades we’ve seen to aggregated bottom-up S&P 500 EPS forecasts have been much shallower than the ones we typically see in any given year.
Meanwhile, the downgrades we’ve seen to aggregated bottom-up S&P 600 EPS forecasts have been in line with the historical average.
Wrapping up with Takeaway #3: Sentiment continued to slip on one of our main sentiment models.
As our regular listeners are aware, we keep a close eye on the weekly AAII survey where elevated net bullishness has been signaling the potential for a short-term equity market pullback…
evated and close to the early-:
We have started to see the aggregate indicator fall in recent weeks, and that continued in last week’s update.
Declines in S&P 500 futures and Nasdaq 100 futures have both occurred.
Russell:
While our valuation work (which forecasts a trailing P/E based on consensus views on several macro variables) still points to upside beyond our 5,150 YE 2024 S&P 500 price target forecast, our sentiment work continues to signal the potential for turbulence between now and year-end.
n of the stock market in late:
The latest data from the Federal Reserve Flows of Funds also indicates that equity allocations are getting close to past highs again as a percentage of financial assets for US households.
to end:
That’s all for now. Thanks for listening. And be sure to reach out to your RBC representative with any questions.
