Today in the podcast we’re talking sectors, following the release of the results of our latest RBC analyst survey which we blend with our own top-down strategy tools to arrive at our sector recommendations.
Three big things you need to know:
in late March and early-April:
• Second, on the performance outlook, our analysts were most constructive on Utilities and Health Care, followed by Energy and Tech, with the weakest outlooks for Consumer Staples, Industrials, and Consumer Discretionary.
• Third, the combination of our analysts’ latest views, our ESG Strategy team’s sector scorecard, and our own macro tools keep us overweight Utilities, Health Care, Energy, and Tech, and underweight Consumer Staples and Consumer Discretionary. We have also downgraded Financials to market weight.
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• Starting with Takeaway #1: in our latest survey, RBC’s US equity analysts were a little north of neutral in their outlooks for performance over the next 6-12 months.
o Our analysts were also generally crowding into the middle, with no one saying they were very bullish or very bearish. All fell into the bullish, neutral, or bearish camps.
nce (relative to our year-end:
o Just three analysts got more constructive on their performance outlook (Media, Building Products, and Chemicals), while 13 got less constructive on the performance outlook (Internet Social Media & Search, Internet Retail & Travel, Oilfield Services, Refiners, Regional Banks, Specialty/Consumer Finance, Life Insurance, Managed Care, Life Science Tools & Diagnostics, IT Services, Coatings, Fertilizers, and Communications Infrastructure).
o Looking beyond performance, our analysts’ views on current valuations, supply chains, pricing, and the impact of potential Fed rate cuts had more clear positive tilts than their views on performance.
o Our analysts also leaned optimistic on the issue of how their companies would manage through higher rates for longer from a balance sheet perspective, as well as their demand assessments.
o Their views on the impact of the banking crisis and the possibility of a sluggish economic recovery were a little south of neutral.
• Moving on to Takeaway #2 on the performance outlook: our analysts were most constructive on Utilities and Health Care, followed by Energy and Tech, with the weakest outlooks for Consumer Staples, Industrials, and Consumer Discretionary.
o Across all questions, the tilts were most negative on Consumer Staples and most positive on Utilities and Health Care. This suggests to us that investors should be selective in terms of how they add defensive exposure and contributes to our own US equity strategy overweights on Utilities and Health Care and underweight on Consumer Staples.
o While our Industrials analysts continued to have one of the more pessimistic performance outlooks, they had clear positive tilts on five of the other nine questions that we asked (margin outlooks, supply chains, pricing, the impact of rate cuts, and the impact of higher rates for longer on balance sheets). This contributes to our own US equity strategy market weight on the sector, which diverges from our analyst teams’ pessimistic performance outlook.
o Rate cuts by the Fed were seen as having a positive impact in most sectors. Our Communication Services and Tech analysts were most likely to see rate cuts by the Fed as positive for their industries. Rate cuts were seen as least impactful for Consumer Staples, followed by Energy and Financials.
o Our analysts expressed general optimism that their companies could manage through higher rates for longer from a balance sheet perspective for most sectors. The only sectors where our analysts expressed a pessimistic view on this issue were Communication Services and REITs.
• Wrapping up with Takeaway #3: the combination of our analysts’ latest views, our ESG Strategy team’s sector scorecard, and our own macro tools keep us overweight Utilities, Health Care, Energy, and Tech, and underweight Consumer Staples and Consumer Discretionary.
o These tools collectively also support our decision to downgrade Financials to market weight, a move that reduces our cyclical exposure and tilts our exposure back towards defensives for now.
n trading around our year-end:
o On the cyclical side, we’d call attention to our thoughts on Energy and Financials. We think Energy is the better choice for an overweight for now.
o While some wrinkles in our Energy overweight have emerged (negative EPS and sales revisions,
o its weak historical performance after both final Fed hikes and first Fed cuts,
o its tendency to underperform when inflation expectations moderate, and less optimism from our analysts), we continue to be struck by how good the sector looks across a number of our tools.
o In particular, it continues to stack up favorably vs. other sectors on valuation and
o dividend yields.
o On Financials, reduced analyst optimism – for some but not all of our teams – isn’t the only reason to take a step back.
o EPS and sales revisions have been negative. Regulatory concerns are likely to be an overhang for quite some time.
o The sector historically has performed well following final Fed hikes, but has tended to be weaker than other sectors following first cuts.
o It has also become one of the most sensitive to the ISM manufacturing cycle, underperforming when ISM manufacturing is falling. While we suspect opportunity is building here, we’d like to see some of these issues play out before getting more constructive.
That’s all for now. Thanks for listening. And be sure to reach out to your RBC representative with any questions.
