Please listen to the end of this podcast for important disclaimers.
, R:
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Takeaway #1: It Is Possible For Stocks To Put In A Major Bottom Before EPS Forecasts Have Finished Falling
• In our meetings with investors over the past week, one issue that clearly weighed on the minds of most of those we spoke with was whether the stock market can bottom while EPS forecasts are still getting cut.
• Our chart of the week highlights clearly – to us at least – that this is not only possible, it’s something that’s tended to be the case in past periods of extreme stress.
EPS since the late:
• While we remain concerned that the need to pull down 2022 and 2023 EPS forecasts will contribute to volatility in the stock market in coming months, this exercise leaves us more concerned about another swing lower in the S&P 500 that merely gives back some of the recent gains or retests the June low, and reduces our concerns about establishing a new low.
Moving on to Takeaway #2: Valuations Are Elevated, But Not Extreme, For The S&P 500 Again But Small Caps Still Look Cheap
for:
• We find it more reassuring for near-term market direction, frankly, that the Russell 2000’s forward P/E remains a bit below its own long-term average. In December 2018 and March 2020, major bottoms in the stock market were achieved when this particular indicator briefly dipped below its long-term average, and its foray to the low end of its historical range helped the broader market establish the mid June 2022 low. At the very least, investors who have become uncomfortable with S&P 500 valuations can still find bargains in the Small Cap space.
Wrapping up with Takeaway #3: Nasdaq Futures Are Starting To Look Overbought Among Asset Managers, But Other US Equity Contracts Have Room To Run
• Deeply depressed levels of investor sentiment for both retail investors and institutional investors, which continue to show signs of healing, have kept us out of the bearish camp.
• But we did see one red flag emerge in last week’s updates, as Nasdaq is starting to look overbought in the futures market. Since Growth and TIMT stocks have powered the rebound, that’s a concerning data point to be sure.
, Russell:
One final thought before we conclude - overall, our sense is that stocks are setting up for some choppiness in the back half of the year, but it seems premature to call an end to the rebound just yet.
That’s all for now. Thanks for listening. And be sure to check out our sister podcast, RBC’s industries in motion, for thoughts on specific sectors from RBC’s team of equity analysts.
