Three big things you need to know today. First, we continue to see expectations for a 2024 economic recovery embedded in GDP forecasts, and a healing process in earnings expectations is also underway – something we’ve been writing about a lot recently. Second, sentiment is embarking on its own recovery, with net bullishness returning to the AAII investor survey. Third, Small Caps appear to be getting their own recovery started, with a gain of more than 6.6% so far in June through Friday’s close, well in excess of the S&P 500’s 2.8% gain. Passive inflows have helped fuel the rebound, but we think the move is justified and remain overweight Small Caps relative to Large Caps.
If you’d like to hear more, here’s another five minutes. While you’re waiting a quick reminder that if you’ve found our work helpful, we’d appreciate your vote in this year’s Institutional Investor All America Research Survey in the Portfolio Strategy category. Voting is open now and expected to close June 23rd.
Now, the details.
: Expectations For A:
We’ve been talking and writing a lot recently about the concept of recovery and its contribution to the strong move in the S&P 500 recently. One of the things we think the bears on US equities have forgotten is that the stock market is inherently a discounting mechanism. Big things usually gets priced in ahead of time. 2022 performance priced in challenges to the economy and earnings backdrop that are unfolding now, and our read on 2023 pricing is that it’s at least partly being driven by unfolding expectations for 2024.
QoQ growth to return in early:
On earnings, bottom-up:
The rate of upward EPS estimate revisions has also improved to 57% in early June.
And most sectors in the S&P 500 are experiencing positive revisions to both EPS and revenue forecasts.
Moving on to Takeaway #2: A Recovery Also Now Appears To Be Underway In Investor Sentiment
the first time since February:
On the four-week average, it’s worth noting that this indicator is still tracking at -4.15%.
The improvement we’ve started to see in AAII is similar to the pick-up in positioning among asset managers that we’ve been seeing in the weekly CFTC data for S&P 500 e minis, which appears to be middle innings.
Interestingly, Nasdaq minis positioning among asset managers has broken through the high end of the range it’s been stuck in over the past few years.
Wrapping up with Takeaway #3: Small Caps Appear To Be Getting Their Own Recovery Started, With An Assist From Passive Flows
ive ratio between the Russell:
As we combed through higher frequency data last week, the thing that jumped out to us the most on Small Caps was the improvement in flows to Small Cap funds that has occurred in June.
Digging down deeper, the improvement has been driven by blend funds….
As well as passively managed funds, a data point that will likely fuel skepticism of the move.
ink the move that the Russell:
en compelling for the Russell:
…as well as on a relative basis vs. the S&P 500…
and on the latter this has also been driven by most sectors.
Beyond Small Caps’ improvement in the earnings backdrop and compelling valuation profile, we’ve also been highlighting how periods of economic stress are normally good entry points for Small Caps.
arkets have mostly priced out:
That’s all for now. Thanks for listening. And be sure to reach out to your RBC representative with any questions.
