If you’d like to hear more, here’s another five minutes.
Starting with Takeaway #1: over the past week we’ve become increasingly convinced that a 5-10% pullback in the S&P 500 may have already started.
and Russell:
• …And that positioning has been looking stretched on the weekly CFTC data for US equities futures positioning – a problem that got worse last week
since late:
• While animal spirits seemed strong a week ago, we noted that given where valuations and positioning were, and where sentiment had been recently, the US equity market seemed to have little capacity to absorb bad news like the dialing down of Fed expectations that’s been underway.
• Investors we spoke with late last week sounded cautious, and our conversations suggest that the move up in 10-year Treasury yields (and the related inflation and deficit concerns) is one of the main things spooking them.
• One thing we’ve been highlighting on this topic is that the earnings yield gap for the S&P 500 has suddenly turned negative and late last week stood at -0.5%. That’s still within a range that’s been accompanied by positive returns in the S&P 500 on a 6- and 12-month time frame. But if the 10-year yield moves up another 50 basis points, this model will be back in a range that is usually accompanied by a decline in the S&P 500 on both time frames.
• The stronger US dollar has also been in focus. Here, we’ve been reminding investors that when the US dollar strengthens year-over-year, the S&P 500 tends to experience downward EPS estimate revisions driven the by Industrials, Materials, Health Care, and Consumer Staples sectors. This is something to keep an eye on as a potential source of disappointment in the next reporting season.
have been firming up for both:
• Note that a 10% drawdown would also take us to around 5,400, which is about where our trailing P/E model has told us the S&P 500 deserves to end the year at if consensus forecasts for inflation, the Fed, and 10-year yields end up being correct.
Moving on to Takeaway #2, post-election company commentary has been heavily weighted to tariffs, a part of the Trump agenda that has concerned many equity investors.
ranscript analysis heavily in:
• And so last week we read through all of the comments from S&P 1500 companies since Election Day in conference transcripts, and earnings calls that highlighted their thoughts on what the new administration means for their companies and industries.
• Many companies referred to the idea that it’s still early days in the new administration and too soon to know too much. In terms of specific issues, tariffs were most in focus, by a mile.
• Companies emphasized how they managed through the China tariffs, and sought to reassure investors by talking about how they have diversified their supply chain.
ne crisis after another since:
• In terms of the more stock market friendly parts of Trump’s agenda, these did come up but not to the same extent as tariffs. We found a decent amount of positive commentary on M&A, deregulation and anti-trust – but not much other than expressing general optimism on these matters.
• Additionally, we found very little commentary on the potential for corporate tax cuts or tax in general, another one of the more important stock market friendly pillars of Trump’s campaign platform.
Wrapping up with Takeaway #3: a very quick thought on Financials.
and Russell:
• We’re keeping a close eye on the sector, but for the moment continue to see slightly attractive valuations relative to the broader market indices within both the S&P 500 and Russell 2000.
That’s all for now. Thanks for listening. And be sure to reach out to your RBC representative with any questions.
