If you’d like to hear more, here’s another five minutes.
Starting with Takeaway #1: Early Reporters Highlight the Optimism & Uncertainty That Are Both Embedded in the Current Outlook for Stocks
As our regular readers are well aware, our team spends a lot of time each reporting season combing through earnings call transcripts for S&P 500 companies to get boots-on-the-ground insights into the outlook and current backdrop for stocks. Here are a couple of things that jump out so far:
• On the macro backdrop, a number of companies have highlighted an increase in post-election optimism, but several have also highlighted an increase in uncertainty as the calendar has turned and have called out the potential for sentiment or conditions to change quickly. Words used to describe the macro backdrop recently have included dynamic, complicated, complexity, and constructive and one company noted that current optimism is being tested. Discussions of risk were front and center, with topics referenced including US domestic policy, geopolitics and war, cyber, and higher interest rates (should they be locked in). Issues fueling optimism included US exceptionalism/strong economic growth and AI.
• Not surprisingly given the heavy dose of Financials, there was a decent amount of discussion of M&A where commentary was optimistic. This was still mostly in reference to pipelines and conversations though some companies did suggest that actual activity was starting to pick up. Commentary on loan growth seemed more mixed.
• On the US policy backdrop, Financial companies highlighted the optimism that emerged post election, and a few also noted that they had seen an increase in business activity around the event. At the same time, companies acknowledged the uncertainty that has also emerged around trade, tax, and immigration policy, which some suggested had contributed to the caution that had also emerged.
• Given the heavy representation of Financials so far, we’ve read a lot of optimistic comments around regulation for the Financial Services industry going forward. After financial regulation, tariffs have been the policy topic most in focus.
• There’s been no major change in discussions of the consumer so far in 4Q24 reporting season. Terms used to describe the consumer in recent calls, which appear to us to capture the view of most companies, have included healthy, confident, and stable with spending referred to as solid and interest in experiences and value seeking behavior still in focus for some.
cuts by the Fed in their:
• Last week, we highlighted six questions that we hoped to gain insight on from the 4Q24 reporting season, and at this point in time it’s fair to say that our questions have not yet been fully answered, though we have gotten a little bit of color on a few of them.
Moving on to Takeaway #2: Investor Sentiment Continued to Slip Last Week, as Some Green Shoots for Business Confidence Emerged
of support for US equities in:
• The bears now exceed the bulls by a wide margin on the weekly AAII survey. As of January 16th, the four-week average for net bulls stood at -3.3%, with the weekly data point falling to -15.2%. This data set tells us that the current period of stock market malaise may not be done yet, as the four-week average hasn’t yet returned to one standard deviation below the long-term average, a level that helped mark the lows in US equities in the fall of 2023. But the removal of froth in investor sentiment that was evident in this survey in October 2024 admittedly improves the setup for stocks over the next 6-12 months.
• Capex expectations shot up in the latest Philly Fed survey, supporting the idea that business sentiment is on the mend.
• Another data point from last week that supports the idea that business sentiment has improved is the continued improvement in Small Business Optimism per NFIB reported for December. That indicator is now starting to approach past peaks. The NFIB survey also highlights the complexity of the vibes narrative in US equity markets, however. Small Business Uncertainty continued to fall on this survey, but stayed somewhat elevated relative to history.
Wrapping up with Takeaway #3: US Equity Funds Flows Lose Momentum, While Global Equity, Non-US Equity, and Bond Funds Flows See Improvement
We’ve been keeping a close eye on funds flows, which often show interesting shifts around the turn of the calendar year. What we’re seeing so far points to some mild reallocations. Here’s what we’re seeing as of mid-January:
• US equity funds flows continue to show a loss of momentum, as US bond funds flows have bounced back strongly.
• Trends in equity flows look better outside US-dedicated funds, as a strong bounce-back in flows to Global equity funds appears to be underway…
• …while trends flows to Western European equity funds continue to show improvement in the form of less negative outflows. Improving trends/strong inflows can also be seen in a number of other non-US developed market geographical categories.
• Within US equities, both Growth and Value funds have seen outflows return, while inflows to Blend funds are moderating.
• Size-wise within the US, Small Cap equity flows have also seen a sharp reversal and have turned negative. Large Cap equity funds have seen a significant moderation in trend but are still in positive territory for now.
• Within Small Cap, we are actually seeing an improvement in flows to actively managed funds which have turned positive, alongside a weakening in passively managed funds, where flows have turned negative.
• Similar trends are in place for US Large Cap funds flows, which have stayed positive in passively managed funds but have also seen a sharp deterioration in trend.
That’s all for now. Thanks for listening. And be sure to reach out to your RBC representative with any questions.
