If you’d like to hear more, here’s another five minutes.
Starting with Takeaway #1: forward P/Es have generally been de-frothed, but haven’t looked deeply compelling for the major US indices.
, Russell:
• What we’re seeing across the data set is supportive of a rebound in the near-term, but may eventually cap upside before another breather is needed.
• At last week’s lows, we generally didn’t get back to even the March 30th lows, which were also generally not in line with the major lows of the post COVID era.
t week – close to its April:
• However, we saw far less improvement in the Russell 2000, which on a weighted NTM P/E basis saw a high of 19.8x at its most recent peak before falling to 19.1x last week, well above the past four major lows which ranged from 13.2-16.4x.
• Meanwhile, the top 10 market cap names in the S&P 500 – our favorite proxy for the mega cap Growth trade – came in somewhere in between. On an equal weighted median NTM basis, that P/E fell from its latest high of 31.6x (like the broader S&P 500, slightly lower than previous highs in the 34-35x area) to 26x, down a clear notch but still well above its most recent lows in the 19-23x range.
What signal does this send, particularly given the latest news on Iran? In our opinion, valuations aren’t standing in the way of a rebound, but don’t have a lot of room available before the ceilings of the recent past are tested.
We come to the same conclusion after reviewing with our sentiment and positioning work….
ake it back down to the March:
• US equity futures positioning per the latest update from CFTC also showed a retreat for US equities, but less significantly and with overall levels still high – roughly one standard deviation above average.
Moving on to Takeaway #2: the valuation case for the broadening trade still has some room (Small Caps, certain cyclical sectors, non-US developed market equities), but requires close monitoring.
• First, the Russell:
• Second, two of the more cyclical/value-oriented sectors that we’ve been overweight, S&P 500 Materials and Financials, have seen their valuation appeal erode slightly as well, but not disappear completely. Both are now slightly above their long-term average on an absolute median P/E, but still slightly below average on a relative P/E basis (our regular readers will note they’ve moved out of the green, into the gold).
• Third, the US is starting to look attractively valued vs. non-US developed market equities, as the NTM P/E between the two cohorts has now dipped slightly below the five-year average again. We are not back to the levels seen prior to the Iran War, however, which really re-opened the door for US leadership to return.
Small Caps, cyclicals, and non-US developed markets equities are all often thought of as important parts of the broadening trade away from leadership by US mega cap growth AI focused stocks. Overall, the data suggests that while the broadening trade has room to run (perhaps supported by the latest war news), but investors will need to stay vigilant for the time when they have run their course from a valuation perspective.
Wrapping up with our bottom line, for now.
• In recent weeks we’ve been concerned about the rising possibility of another short-term, tier 1 garden variety pullback of 5-10% in the S&P 500 returning, while remaining constructive on the S&P 500 longer term with our 12-month price target of 7,900.
• On the longer-term, 12 month view, there’s been no change in our constructive stance. It will take some time to fully understand all of the ramifications, but we see the weekend’s developments as pointing to upside risk to our price target.
• In the near-term, the weekend’s developments on the war have lowered tier 1 pullback risks for now, especially since the recent dip had already taken the index down 4.5% from peak – not quite back tier 1 in our four tiers of fear framework for pullbacks.
o consensus EPS forecasts for:
• We also will be keeping a close eye on how views around the Fed, interest rates, and inflation are adjusted in the weeks ahead, as this had become one of the more concerning issues we’ve been monitoring.
That’s all for now. Thanks for listening. And be sure to reach out to your RBC representative with any questions.
