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Debt Ceiling Drama, More Mixed Earnings Messages, Sentiment Rebound
Episode 722nd February 2023 • RBC's Markets in Motion • RBC Capital Markets
00:00:00 00:05:58

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I’m Lori Calvasina, head of US equity strategy at RBC Capital Markets. Please listen to the end of this podcast for important disclaimers.

This week in the podcast, three big things you need to know: First, we see the drama in DC over the debt ceiling as a potential risk to keep an eye on for US equities later this year. Second, mixed messages persisted in last week’s earnings calls, with a slightly more positive tone than the prior week. Third, the rebound underway in investor sentiment, which has helped stocks stay resilient, still appears to be middle innings.

If you’d like to hear more, here’s another five minutes. While you’re waiting a quick reminder that you can subscribe to an audio only version of this podcast on Apple and Spotify.

Now, the details.

Takeaway #1: Debt Ceiling Drama Is A Risk To Keep An Eye On Heading Into The Summer

various dramas dating back to:

First, the worst debt ceiling dramas for stocks occurred when angst was already high in financial markets for other reasons and total declines ranged from 10-19%.


• The nearly 12% drop in the late summer of 2015 occurred against the backdrop of rising recession fears.

% drop in early:

%. This what we saw in:

Third, while there were a few instances in which stocks were hit by debt ceiling drama in the first quarter, for the most part the impacts were felt later in the year.

a clear path of deceleration,:

To gauge potential sector impacts, we took a look through event transcripts, press releases, and major filings for S&P 500 companies over the past 30 days to gauge which parts of the market have been highlighting the debt ceiling the most as a risk factor.

We found the most commentary in Industrials (especially defense names), Health Care, and Financials. Companies have tended to highlight the potential impact to the defense budget process and program funding, government funding for health care, FDA reviews and other impacts to health care regulation, and the potential disruption to capital markets and knock on effects to economic growth and access to financing.

Moving on to Takeaway #2: Mixed Messages Continued in Last Week’s Earnings Calls, With A Slightly More Positive Tone Than The Prior Week

• Key themes we took away in our review of earnings call transcripts last week included the idea that resiliency continues to be seen in recent trends within the US.

• Looking ahead, a mild recession, uncertainty, and recovery are all being baked in to outlooks.

• Internationally, the idea of weakness in China near-term with a back half recovery continues to be highlighted (there was less talk about uncertainty in the China outlook than we observed the prior week).

• Meanwhile, several companies noted that Europe has avoided recession despite some softness.

• We paid careful attention to inflation related comments. Several companies noted that inflation remains a headwind to demand in the short term and is still supportive of the pricing environment.

• Commentary on supply chains jumped out as being mixed with some companies highlighting progress and others emphasizing ongoing challenges.

• Commentary on buybacks, dividends and FX was mostly favorable. As was the case with China, the FX commentary came across as a bit more constructive than what we read the prior week.

Wrapping up with Takeaway #3: A Rebound in Investor Sentiment Has Been Underway, and Still Appears To Be Middle Innings

We’ve been keeping a close eye on the AAII level of net bullishness. Like CFTC’s data on US equity futures positioning among asset managers, which hasn’t been released in a few weeks, AAII net bullishness ended last year down near historical lows suggesting that bearishness on US equity markets had gotten too extreme.

In last week’s update, net bullishness in the AAII survey stood at 5.3% in favor of the bulls and had moved up to 1.2% on the four week average. We have no idea what the CFTC update will show when it finally comes in. But the recovery that’s been underway in individual investor sentiment has helped to explain why stocks have mostly been resilient in recent weeks despite a new round of rising Fed and inflation fears and geopolitical tensions.

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