The big things you need to know: First, we review the results of a survey we conducted of RBC’s equity analysts on the conflict in Iran, which helps explain the resilience we’ve seen in the S&P 500. Second, the valuation and sentiment barometers we’re tracking point to room for further downside in the S&P 500 in the near-term in absolute terms, while our work on US valuations vs. other global developed markets highlights why the US equity market has been embraced as a safe haven, helping outperformance versus global peers to re-ignite.

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

Takeaway #1: The analyst survey we conducted last helps explain why US equity markets have been so resilient amid the Iran conflict.

We asked our equity analysts to assume the conflict endures for more than four weeks, and oil stays above $100 for an extended period of time. We then asked them to indicate the impact to EPS from higher oil and gas prices, the revenue impact due to exposure to the Middle East, and the overall impact from knock-on effects.

Three key findings:

• First, fundamental risks to the US equity market from a worsening of the conflict are concentrated in certain areas and see as low overall. Among our non-Energy analysts, 72% said that EPS impacts from higher oil and gas would be “none,” “only a little,” or “not relevant/mixed/ don’t know.” The same was true for 77% when we asked about revenue impact from the Middle East impact, and 66% when we asked about impact from knock-on effects. Does this data suggest that a worsening of the conflict doesn’t matter to US equities? No, but it does suggest that the risks are concentrated in certain areas and that in many the potential impacts are not seen as highly significant.

• Second, Communication Services, Financials, Health Care, and Utilities stand out as some of the most insulated sectors from a worsening of the conflict. Almost all of our analysts in these industries replied to each of our questions regarding impact with “none,” “only a little,” or “not relevant/mixed/don’t know.” On the flip side, Consumer Staples and Materials were seen as being most impacted, though it should be noted that their answers were mostly “some/a decent amount” as opposed to “a lot” on all three of the questions that we asked.

• Third, Inflation and consumer confidence/sentiment were the top knock-on effects highlighted by our analysts. Next in line were demand issues, fuel prices, supply chains and transportation costs, and various issues related to a defensive tone or risk off bent. We find it interesting that inflation and consumer confidence – two problems US equity investors and public companies have been contending with at various points in the post COVID era – have been most in focus in terms of the challenges that this crisis presents. This may speak to the idea that the ripple effects of the conflict are a worsening of ongoing problems that can be managed.

Moving on to Takeaway #2: Signals from our valuation and sentiment work.

• Last week we highlighted several sentiment and valuation barometer’s we’re watching that have helped us gauge when periods of stress have gone too far in recent years in absolute terms for the S&P 500. None of them are signaling an end to the current moment we’re in right now.

• Net bulls on the AAII survey moved up last week – we think a further erosion of sentient would have been healthier for stocks. We’re watching for a move to 1 or 2 standard deviations below average.

• And the Russell 2000 FY2 P/E, which fell below 13x at the lows of the major drawdowns of 2022, 2023, and 2025, is back down to 16.1x, but still well above the average of 15.2x and not close to the 11-13x range which also tends to be seen in recessions.

• When we look at valuations through a different lens, however, we gain an appreciation for why downside has been less severe in US equities than most global developed market peers. Our global valuation charts highlight how the FY2 P/E of non-US developed market equities has moved up sharply of late, both in aggregate and in a number of different countries.

• And when we look at the US relative to non-US developed markets, the relative FY2 P/E has come back down to levels close to the long-term average, and to levels below the five-year post-COVID average. We think this opened the door for the geographical leadership trade to pause at a time when investors were looking for safe havens. This, in turn, has helped the mega cap Growth trade in the US start to outperform again. As we’ve highlighted before, when the US underperforms non-US equities and Europe in particular, Growth tends to outperform Value in the US as well.

• In general, we think the rotation trades from Growth to Value and Large to Small that had been underway in the US are on pause as long as Middle East tension remain high. In the case of Small Caps, this isn’t just about safe haven seeking. Some of the earnings related data points that had been looking better in Small Cap than Large Cap recently have slipped, and Friday’s weak jobs report also argues against Small Cap outperformance for now.

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