The big things you need to know: First, valuation opportunity is opening up in the US equity market from a variety of perspectives. Second, in the aftermath of Wednesday’s Fed meeting, we highlight how the stock market tends to experience choppy performance in the first few months under a new Fed Chair. Third, other things that jump out in our updates this week include the return of high EPS quality outperformance as a factor in both the S&P 500 and Russell 2000, the modest uptick in stock market optimism in the Conference Board consumer survey that was out this week, and what we’re watching on the midterms (which we continue to see as a risk factor in the months ahead). Fourth, we’ve gone through our monthly refresh of the models that feed into our 12-month S&P 500 price target and are sticking with our 8,150 forecast, though we continue to believe that the path for stocks will not be a linear one.
If you’d like to hear more, here’s another 5 minutes.
Takeaway #1: Valuation Opportunity Is Opening Up In The US Equity Market
Given the severe unwind in the momentum trade that we’ve continued to see, and the onset of heavy earnings in the 2Q26 reporting season, we refreshed our various valuation charts on Thursday (as of the Wednesday close) to get a sense of whether anything important has changed in terms of the valuation profile of the US equity market recently. Several things suggested to us that valuation opportunity is starting to be unlocked.
ls last seen in late-February:
Second, the NTM P/Es of the major indices in the US are starting to look reasonable again. Specifically, the NTM P/E of the S&P 500 has gotten close to its past few major lows.
This is also the case for the NTM P/E of the Nasdaq 100, which is also back down to its long-term average.
e, the NTM P/E of the Russell:
Third, the Tech sector is now looking slightly attractive on our S&P 500 sector valuation model, which is based on median FY2 P/Es. The Tech sector (which contains Semis & Semi Equipment, Hardware, and Software, but not the big Internet names, which are housed in Communication Services) is slightly below its long-term average on both a relative P/E vs. the broader market and an absolute P/E that looks at the sector relative to only its own history.
We pointed out in last week’s Pulse that S&P 500 Semis & Semi Equipment’s forward P/E was back down to average, and we continue to see that in our data today. Software stocks have also been well below their own long-term average on an absolute median P/E.
Moving on to Takeaway #2: Fed Transitions Can Be Tough For The Stock Market
drawdown in late:
Next – Takeaway #3: What Else Jumps Out In Our Work
• To begin with, high EPS quality is working. While the high price momentum factor was under pressure most of last week, one thing that stood out to us in our end-of-week data updates was that high earnings quality has been outperforming not only in Small Cap, but in Large Cap as well (admittedly to a lesser degree).
• Next, consumers remain optimistic on stocks. In last week’s podcast, we reviewed the indicators we’re tracking to monitor the health of the retail investor. One of these is the Conference Board’s consumer survey question on stock market optimism, which ticked up in July. While optimism is elevated, we see the resiliency in this stat as a positive data point for the stock market for now.
midterm elections (including:
• We’ve started to track how different sectors are performing alongside shifts in betting market expectations for different outcomes. Interestingly, Tech performance (relative to the broader market) has been positively correlated with the Republican sweep scenario since late March, while Health Care and Financials performance has been more aligned with trends in expectations for a split Congress (Republican Senate & Democratic House) over the same time period.
Wrapping up with Takeaway #4: Our US equity market outlook
• There’s been no change to our 12-month price target of 8,150. We’ve refreshed the math for the five models that go into our target for late July. 8,150 remains an approximation of the median and average of our five models.
• While the output from our valuation/EPS model has come down a bit since our late-June update (due to more conservative assumptions on our part on interest rates and the EPS outlook), the output from our GDP model has moved up (due to slightly improved GDP forecasts from consensus and RBC Economics).
• Overall, our modeling is telling us that despite the potential pressures on the P/E multiple from higher rates and inflation, there is still a path higher for stocks over the course of the next year due to strong earnings growth, a solid GDP backdrop, and subdued sentiment, which has left room for stocks to climb the wall of worry.
�� War setbacks, pulling down:
That’s all for now. Thanks for listening. And be sure to reach out to your RBC representative with any questions.
