Today in the podcast, two big things you need to know: First, AI leadership bounced back as the summer came to a close, but tactical problems with the Growth trade remain. Second, things that jumped out in our high frequency indicators last week included improving EPS revisions in Energy and Financials and an improvement in 2024 GDP forecasts, both of which support a transition in stock market leadership back to Cyclicals and Value.
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Takeaway #1: AI Leadership Bounced Back As Summer Came To A Close, But Tactical Problems With the Growth Trade Remain
• AI has been in the spotlight within the equity community this year, and with this in mind we’ve been tracking the levels of AI related commentary in S&P 500 transcripts, as well as the performance of the stocks that have been talking about AI the most within the S&P 500.
• In our Charts of the Week, we highlight how the level of AI related commentary in S&P 500 transcripts moved up in August but was still below its June peak…
have outperformed strongly in:
• The bounce back in AI leadership, despite AI related commentary tracking below peak levels, provided a somewhat confusing end to a summer in which a transition in leadership away from mega cap Growth stocks that many investors had been hoping for seemed to be finally getting underway.
• Despite that late summer shift, it’s important to keep in mind that the tactical problems with the Large Cap Growth trade we’ve been writing about this summer haven’t gone away.
o Growth valuations have only corrected slightly vs. Value and remain extremely elevated.
o The weekly CFTC data for asset manager positioning in Nasdaq 100 futures has suggested that the Large Cap Growth trade has been over owned, and that positioning is starting to stall.
o Earnings sentiment (the rate of upward EPS revisions) continues to favor Growth relative to Value, but the gap has started to narrow suggesting that Growth is seeing its dominance on the earnings front fade.
o And flows to US Growth funds have also turned negative, while Value flows are still negative but stabilizing.
o Stock market concentration – the percent of S&P 500 market cap in the top 10 stocks – is also back to levels that marked an all time high earlier this year.
Moving on to takeaway #2: What Else Jumps Out On Our High Frequency Indicators
• Two of these support a leadership transition back to Cyclicals and Value.
o First, EPS revisions trends are improving in two key Cyclical/Value sectors. On the latest available weekly data, both Energy and Financials have moved into positive territory meaning both are seeing mostly positive revisions to sell-side EPS forecasts.
o Second, full year:
o Number three is more pertinent to the broader market directional call: overall equity market sentiment/positioning is in retreat. Net bulls on the AAII survey (the four-week average) continued to ease last week ….
o …while positioning by asset managers in S&P 500 futures contracts has also moved a little lower in recent weeks. This alleviates one of our near-term concerns about US equities, but we aren’t yet back to levels that suggest this deterioration in sentiment has fully played out.
That’s all for now. Thanks for listening. And be sure to reach out to your RBC representative with any questions.
