If you’d like to hear more, here’s another 7 minutes. While you’re waiting, a quick reminder that if you’ve found this podcast and our work helpful, we’d appreciate your support in this year’s Institutional Investor All America Research survey in the Portfolio Strategy category. Now, let’s jump into the details.
Flip to slide 2
year-end:
• We’ve refreshed our models that go into our targeting process and reworked a few of them. 4,700 is roughly the average and median of 11 different scenarios that we examined. Flip to slide 3
ng to a year-end close in the:
o Our GDP assumptions in our models are inspired by the views of our in house economics team and trends in sell-side consensus economic forecasts. Our economists see recession as up for debate, but their call is for real US GDP to come in at 2% for the year. For 2023 they are pointing us to a mid 1% type number. Flip to slide 4
eturn to below average GDP in:
• Our sentiment models, which bake in typical recoveries off bottoms in the AAII survey and off growth scare lows, call for the S&P 500 to end the year in the 4,500-4,900 range. When net bearishness on the weekly AAII retail investor survey bottoms, stocks are usually up more than 9% 7 months later and more than 15% 12 months later. Flip to slide 6
€¢ Off growth scare lows like:
• Our three cross asset models, which compare stocks to bonds and focus on earnings yields vs. 10 year yields, the dividend appeal of stocks vs. Treasuries, and real yields, all suggest the S&P 500 should end the year in the 4,300-4,400 range - a reminder that bond yields are taking a bite out of forward equity returns. Flip to slide 8
e similar to what was seen in:
• We continue to see recession and a broadening out of the Russia/Ukraine war as the big risks to our market call and as we’ve discussed before if the 3850 level in the S&P 500 – which would price in a full growth scare similar to 2011 and late 2018 – doesn’t hold – the S&P 500 could fall to 3,200 for a 32% drop which would bake in the average recession. But we don’t think recession is a foregone conclusion right now and that it’s premature to bake one in. Flip to slide 10
• If a recession can be avoided, stocks have probably seen their lows. There were some initial signs of healing in last week’s AAII retail investor sentiment update. And we’re also seeing signs of a rebound from institutional investor capitulation in the weekly CFTC data. Flip to slide 11.
(2) Moving on to takeaway #2: We continue to be more intrigued with Growth over Value going forward as most of our indicators look better for Growth or are fading for Value.
• Growth got hit hard in May but is attempting yet another comeback over the past few weeks. (PAUSE/Flip to slide 12)
expect to be the case in late:
• The earnings backdrop has favored Value, but this could soon change. Value has only a slight advantage vs. Growth on the rate of upward earnings revisions, an important gauge of earnings sentiment, and Tech, an important Growth constituent, is starting to ramp up again. (PAUSE/Flip to slide 19) Additionally, Value margins tend to display better trends than Growth margins when the economy is running above average, but Growth margins tend to trend better when GDP Growth is below average. (PAUSE/Flip to slide 20)
• It’s also worth noting that the three primary Growth sectors – Comm Svcs, CD, and Tech – are at historic lows relative to Defensive sectors (Staples, Uts, and HC) on relative P/E – something else that supports the idea of rotation into Growth as well as the idea that the stock market has bottomed. (PAUSE/Flip to slide 21)
hedge fund stocks is back to:
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(3) Wrapping up with takeaway #3: We recommend removing underweights on Small Cap and moving back to neutral vs. Large Cap.
tive to Large Cap for most of:
• We think this is deserved - as Small Cap has started to look intriguing or better on our positioning/sentiment, valuation, and earnings work. (Flip to slide 24)
• Importantly, Small Cap futures positioning among asset managers actually fell below Financial Crisis lows in May pointing to true capitulation. (Flip to slide 25)
• On valuation, the Russell:
• And on earnings, Small Caps are starting to look a little better than Large Cap on the rate of upward EPS estimate revisions. (PAUSE/Flip to slide 30). Large Cap also seems to be losing its margin advantage vs. Small Caps. (PAUSE/Flip to slide 31)
• Though the risk/reward for Small Cap has improved, we’re not ready to shift back to overweight yet due to ongoing fundamental headwinds. Small Cap typically underperforms Large Cap when ISM manufacturing is falling, (PAUSE/Flip to slide 32) when GDP is below average, (PAUSE/Flip to slide 33) after the Fed starts tightening, (PAUSE/Flip to slide 34) and when high yield spreads are widening.
elative to Large Cap in early:
• In a way, recession could be another. Historically small caps underperform early on in a recession, but outperform in the market rebound on the way out of recession, and usually end up outperforming over the course of recessions from start to finish.
That’s all for now. Thanks for listening. And be sure to check out our sister podcast, RBC’s Industries in Motion, for additional thoughts on specific sectors from RBC’s team of industry analysts.
