The big things you need to know: First, we review our key takeaways from our review of March company commentary on the Middle East conflict on EPS calls and in conference presentations. What we read adds to our understanding of why the US equity market has been fairly resilient since the Iran strikes, and also leads us to believe that it may simply take more time for the equity community to fully understand the impacts from an extended conflict. Second, other things that jump out this week include much better EPS estimate revisions trends in the top-10 market cap names in the S&P 500 than the rest of the index (a point in favor of mega cap Growth stocks continuing to outperform), the sharp drop in investor sentiment on our AAII model (a bullish data point for the broader market) and the return of the Russell 2000 FY2 P/E to its long-term average (important progress but not a return to “hold your nose and buy” territory).

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

Takeaway #1: March Company Commentary Highlights Another Reason for the US Equity Market’s Resiliency, Plus the Idea That It May Take More Time to Fully Understand the Impacts

In terms of the bigger picture, companies have been describing the war as fluid and evolving with the duration of the military conflict and the closure of the Strait of Hormuz in focus. While a few companies noted the possibility that higher oil could spark a recession or an economic downturn/disruption, others emphasized that they or their customers are used to volatility or highlighted their ability to manage through. Several noted they were closely monitoring the situation and running scenarios and stress tests. One company provided some helpful framing for how to think about impact. They organized it in “four tiers” in terms of how quickly they would feel the impact: direct exposure in the region, freight shipping availability, cost and inflation including raw materials, and demand. This was a good reminder that it will likely take time for impacts to filter through.

In outlook discussions, many companies noted that it was early days or too soon to tell what the impacts will be. A few alluded to the idea that there was some conservatism in their guidance due in part to the conflict, but others expressed confidence in guidance unless there was a major escalation. Optimistic comments around manageability seemed tied to the idea that the conflict will be of shorter duration. Several companies referenced the idea of passing through higher costs, having some amount of inventory on hand (one company mentioned 6 months), or the idea that impacts would not be seen until the latter part of the year. A few openly discussed hedging. Many noted that their direct exposure to the region was minimal. The outlook commentary we read left us thinking companies have had good reasons for staying calm, and that any risk to earnings likely lies more in 2nd-half numbers.

On demand, several noted they had not seen material impacts yet, while a few noted their expectation for near-term headwinds. Some thought that demand might get pulled forward in the short-term due to 2nd-half/supply chain concerns. Other companies noted defense-related products, ammo, and drones/counter drones might be expected to see a demand boost. One company also highlighted that longer term, the rebuilding of infrastructure could boost demand.

On the consumer, one company noted that the strength at the top in the K-shaped economy was a positive as that cohort tended to be more immune to these kinds of events. On the topic of what level of gas prices would be a pain point or cause demand destruction, one company pointed to $4/gallon while another pointed to $5/gallon. Hotel/travel companies noted that they had seen cancellations within the Middle East region but that it had not rippled out, though some acknowledged that could change in the future especially given the sensitivity of airfares to the conflict. We’ve been underweight the Consumer Discretionary sector and market weight the Consumer Staples sector this year, and what we read last week keeps us on the sidelines for both sectors for now. We’d be more open to Staples as a rebound play on conflict resolution given better valuations.

Impacts to supply chains accounted for a considerable amount of the discussion. Transportation and freight costs and the rerouting of shipments were in focus. In addition to oil and natural gas, resin, fertilizer, aluminum, and helium were referenced. Some companies noted they would draw on past experience to manage. Several noted they hadn’t seen major impacts yet. Surcharges and extended lead times were mentioned as well. The good news here is that companies have become accustomed over the past decade to managing through supply-chain problems. But the bad news is that this issue is clearly taking up much of the C-suite headspace at the moment, which could delay other initiatives.

Zooming out, in our client conversations we’ve been highlighting how improved valuations in the US relative to non-US developed markets generally opened the door for the US to act as a safe-haven trade, and how our analyst survey on the war’s impacts supported the idea that the US equity market should be seen as having some fundamental buffers. What we read in transcripts from the past two weeks confirms to us that companies have been providing investors with additional reasons at the company level to see the US as relatively insulated, and we think that that reassurance has also contributed to the resiliency of the US equity market

But what we read last week also indicates to us that if adverse and significant impacts are coming, particularly from an extended or escalated conflict, it will simply take additional time for companies to understand what those are and communicate them to investors. What we read also suggests to us that companies tend to believe a shorter-duration conflict can be managed through, but there are many open questions if it goes on too long.

Moving on to Takeaway #2: What Else Jumps Out

On the rotation trade – the top-10 market cap names in the S&P 500 have seen a big surge in the rate of upward EPS estimate revisions, which is nearly back to the highs of last fall. Meanwhile, the rate of upward EPS estimate revisions has stayed weak for the rest of the index. In addition to safe-haven seeking in the US, we think this helps to explain why the broadening trade has paused since the Iran conflict began and the US has reclaimed leadership geographically.

And finally, the market cap-weighted FY2 Small Cap P/E has fallen back down to average. Along with AAII net bulls, the Small Cap P/E is something we’re keeping close watch on to help us gauge when the period of stress in equities broadly may have gone too far (short-term tactical signals rather than longer-term S&P 500 targets is what we’re focused on at the moment). As of March 18th, this indicator was back down to 15.16x – in line with its long-term average of 15.18x. It had started out the year at 17.5x, a bit below the November-2024 high of 18.1x. We are keeping an eye out for a return to recession pricing, which could help us tell when the current period of market angst has played out. In 2022, 2023, and 2025, this indicator fell a bit below 13x, which is also close to where it tends to bottom out in recessions (the 11-13x range). The valuation improvement that’s been seen, along with the modest dial-down of positioning per the CFTC data, admittedly opens the door to the possibility of Small Cap outperformance once Middle East clouds clear. But that may be a short-lived trade since Fed-cut optimism has receded following the last Fed meeting, and we are no longer seeing better trends for Small Caps than Large Caps in some of our earnings indicators.

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