Please listen to the end of this podcast for important disclaimers.
reshed the math behind our YE:
If you’d like to hear more, here’s another five minutes.
Starting with Takeaway #1: Our Framework for Thinking About Downside Risks To US Equities When Uncertainty Mounts
For many investors we’ve been speaking with, uncertainty and anxiety have increased over the past few weeks. The disruption in Washington, health of the consumer and health of the labor market have been in focus, with lower 10 year-yields and renewed discussions about cuts from the Fed later this year providing some comfort. For many weeks, most US investors we’ve spoken with have assumed tariffs would be a negotiating tool rather than a long-lasting reality, but in last week’s meetings several investors expressed to us their worry that this idea had become too consensus.
Some investors from completely different corners of the US equity market, with completely different investment styles, have asked us a similar question in recent weeks – “how do we think about potential downside risks to the US equity market?” Some have simply been thinking about where a “put” might be in the short-term. Others have been thinking about how US equities respond generally to big uncertainties. Here’s what we’ve been saying about the four tiers of fear as we’ve started to call them.
on daily close prices). Since:
an extended of time, and from:
Tier 3 – recessions and wars (roughly 25-33% drawdowns). When growth fears turn out to be legitimate, the S&P 500 tends to lose around a quarter to a third of its value. War related drawdowns in recent decades have been similar.
ch bubble unwind of the early:
some of our go to ones (since:
Moving on to Takeaway #2: Refreshing The Math That Goes Into Our Bear Case
Back in November:
is now baking in flat EPS in:
Both the old and new valuation/earnings stress tests point to fair value for the S&P 500 at year end slightly above 5,600. The improvement in the multiple in our new stress test is offset by the EPS degradation that we assumed a growth scare might lead to.
Next, Takeaway #3: A Vibes Update…
t of the bullish consensus on:
with levels seen in September:
a level last seen in October:
We also got more evidence of weakening consumer vibes. Consumer confidence fell and missed expectations in the Conference Board survey released last week, and is now near the low end of its post COVID range.
The most interesting thing to us was that consumers’ expectations of where the job market is headed has deteriorated, echoing what we saw in the prior week’s CEO confidence survey. These releases have struck a nerve with some of the investors we’ve spoken to. Several mentioned noticing more layoff announcements by public companies, something we’ve also observed.
Wrapping up with Takeaway #4 on Small Caps….
nce, the ratio of the Russell:
Meanwhile, the Russell:
We’ve been neutral Small Cap relative to Large Cap and think it’s premature to turn overweight. We’d like to see CFTC positioning in US equity futures get hit harder before believing the froth is completely out of this corner of the equity market, and think we are still in the early days of ratcheting down economic expectations.
That’s all for now. Thanks for listening. And be sure to reach out to your RBC representative with any questions.
