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Valuations Ending 2023 At Reasonable Levels, But Pullback Risks Have Grown
Episode 1721st December 2023 • RBC's Markets in Motion • RBC Capital Markets
00:00:00 00:05:03

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th,:

Today in the podcast, our last of 2023, two big things you need to know:

ew trading days left to go in:

- Second, while we remain constructive on the year ahead, several charts that we track regularly are starting to suggest that the rally in the S&P 500 is due for a pause.

If you’d like to hear more, here’s another five minutes.

Now, let’s jump into the details.

Takeaway #1: The S&P 500 Seems Poised To End The Year At A Level Our Valuation Model Suggests Is Reasonable

ive than many of our peers on:

- In hindsight there was one model that we should have paid more attention to. That was our valuation model, which was consistently the most constructive tool in our toolkit all year. That model uses the relationship between trailing average P/E’s and inflation, GDP, and interest rates dating back to the 1960’s to project where the trailing P/E of the S&P 500 should be at year-end based on consensus macro forecasts.

full-year:

- Back in August, before YE 2023 10 year-Treasury yield forecasts had finished moving up, the model was pointing to a YE 2023 P/E of 21.8x or close to 4,800 on price.

his model is telling us about:

- Even if:

Takeaway #2: Risks of a Short-Term Pause in the S&P 500’s Rally Have Grown

- While we remain constructive on the US equity market in the year ahead, another topic that’s been coming up in our recent investor meetings has been whether the rally in the S&P 500 is due for a pause.

- We think the risks of a pullback have risen for a number of reasons. These include:

o Net bulls in the AAII survey are tracking at 25.7% on the four-week average, more than one standard deviation above it’s long-term average.

o When this indicator is between one and two standard deviations above it’s long-term average, the S&P 500 tends to be up 6.5% over the next 12 months…

o but is flat over the next 3 months.

o This echoes what we are seeing the weekly CFTC data on asset manager positioning in S&P 500 futures, which is close to recent peaks.

fter breaking out to new post:

expressing concern about the:

o Inflows to US equity funds may also be starting to stall….

o at a time when flows to equity funds focused on several major non-US geographies are starting to improve.

o Leadership rotation, specifically outflows from Growth funds, are part of what’s driving the weakness, reminding us that the when Growth lags Value, US equities tend to underperform non-US equities.

o Finally, in three of the past four years, and six of the past ten, the S&P 500 has been down in January. Seasonal trends have mostly been working in recent months as well.

That’s all for now. To all of our regular podcast listeners, we are so grateful that you are keeping us in your queue. We look forward to continuing the conversation about the equity markets in the new year, and wish you all a very happy, holiday season.

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