Today in the podcast, three big things you need to know: First, last week’s price action relieved some pressures on the stock market, but didn’t solve its major problems. Second, earnings remain solid with no major deterioration in corporate tone. Third, we’d be more selective with value-oriented defensive sectors going forward.

If you’d like to hear more, here’s another five, maybe six minutes. Now let’s jump into the details.

Starting with Takeaway #1: Last Week’s Price Action Released Some Pressure for the US Equity Market, But Didn’t Fully Solve Its Major Problems

• Though none of the stock market’s problems were fully fixed last week, some pressure was released.

o AAII net bulls are no longer sitting at 1 standard deviation above the long-term average, and have pulled back into neutral territory though not deeply oversold territory.

o The median P/E of the top 10 names in the S&P 500 has fallen to ~24x (down from ~32x at its recent intramonth high), but remains well above its average of ~18x.

• Some problems remain, however.

o Seasonality has been a problem for stocks the last few years not only in August but in September and October as well.

o September, when many sell-side firms hold industry conferences, will likely be a tricky time as companies tend to be reluctant to provide too much forward-looking commentary at this time of the year.

o The US election, which tends to be accompanied by softness in equity markets in September-October, will still be unresolved.

o Rate cuts will remain top of mind, including the tendency of US equities to fall after first Fed cuts in recent cycles.

Moving on to Takeaway #2: Earnings Remain Solid, There Was No Major Change in Tone on Earnings Calls Last Week, Despite Some Incremental Negative Commentary on the Consumer

• On the stats:

o The percent of companies in the S&P 500 beating consensus forecasts on EPS continues to outpace the percent beating consensus forecasts on sales (80% vs. 59%), but both remain up a little from the last reporting season.

o Earnings sentiment is essentially neutral as the rate of upward EPS estimate revisions is tracking at 47%.

o Investors seem to be ignoring earnings in some respects. Companies beating consensus EPS forecasts are actually underperforming in terms of price reaction, something that’s not normally the case.

• As we’ve read earnings call transcripts, we’ve been monitoring whether recent events have had an adverse impact on corporate confidence that could lead to more cautious company behavior on the labor front. We don’t see evidence that this is occurring.

• Some highlights:

o One Industrial company commented that macro uncertainty is a bit higher than a few months ago, and that they are watching what happens with the consumer, Fed and economy – we think this did a good job of summarizing where many companies’ (and investors’) heads are at right now.

o Consumer commentary was admittedly a bit more negative last week as travel came more into focus. Negative comments got a lot of attention, but we also saw more positive commentary from other companies get ignored.

o On labor and layoffs, there was no real change – not much that we saw in general and not much that alarmed us. One company commented that they are “not particularly worried from one report that we're heading into some kind of consumer recession” – this struck us as helpful to understanding the state of the corporate mindset at the moment.

o On recent market volatility, we also didn’t find a lot. One company noted it was too early to determine if there had been a market turn. We don’t doubt that a continuation of heightened market volatility or a string of sizable economic data misses would adversely impact corporate confidence, but we haven’t hit that point yet.

o References to uncertainty and risk have been much lower than in 2016 and 2022, and references to confidence have been moving up – a trend in place post COVID.

o While things could obviously change, and it’s important to monitor the conversation, for now companies still seem to be in a zone of calm.

Wrapping up with Takeaway #3: We’d Be More Selective on Value-Oriented Defensive Sectors Going Forward

As we were reviewing our sector charts on Friday, one thing that stood out to us was how Value-oriented defensive sectors – specifically, REITs and Utilities – within the S&P 500 have outperformed the most so far during the 3rd quarter. Both benefit from a rotation into Value and often trade defensively.

Our top-down tools suggest being a little more selective in both going forward, and make a case for Utilities (which we’ve been overweight) over REITs (which we’ve been underweight).

• Flows to US Utilities funds have been positive and are continuing to improve. Flows to US REITs funds have also recently turned positive but are a bit weaker than what we see in Utilities.

• Valuations seem to have gotten less appealing for both sectors, but again look better for Utilities. Although Utilities are now a little above average on median forward P/E, the sector is still a little below average on a median P/E relative to the broader S&P 500.

Though it’s a cyclical sector by nature, and may not really get going until economic/consumer clouds clear, we have gotten incrementally more interested in Financials, a sector that we’ve been overweight.

• This sector was looking a little pricey on our valuation model within the S&P 500 recently, but is now looking slightly attractive again. Financials is also one of only two sectors within the S&P 500 that’s been seeing positive revisions on the sell-side to both EPS and revenue forecasts.

That’s all for now. Thanks for listening. And be sure to reach out to your RBC representative with any questions.