As 2025 gets underway, four big things you need to know:
• First, modest downward revisions have returned to bottom-up consensus S&P 500 EPS forecasts.
• Second, frothy US equity market sentiment has been a problem for the US equity market, but our work suggests that many investors have become cognizant of this problem and that it is starting to self-correct.
• Third, outside of the biggest market cap names in the S&P 500, a number of our valuation indicators have started to contract.
y funds flows deteriorated as:
If you’d like to hear more, here’s another five minutes.
Before we jump into the details, a very happy new year to all of our regular listeners.
• Let’s start with takeaway #1, modest downward revisions have returned to bottom-up consensus S&P 500 EPS forecasts as the new year has gotten underway.
• This is a condition that often accompanies a stronger US dollar.
• Dollar strength remains a key challenge for S&P 500 EPS as we head into reporting season, in our view.
• Moving on to takeaway #2, frothy US equity market sentiment has been a problem for the US equity market, but our work suggests that many investors have become cognizant of this problem and that it is starting to self-correct.
e weekly AAII survey faded as:
• But as of January 2nd, at 6.45% the four-week average for net bulls had fallen slightly below the long-term average of 6.8%. The unadjusted weekly data point basically also had bulls and bears in line with one another.
• Although the AAII survey is focused on individual investors and we speak mainly with institutional investors, we think this survey does a good job of reflecting the wariness that we sensed in our December client conversations, particularly among non-US based investors. We’d characterize non-US based investors as cautious in December, and US-based investors as having a mix of optimism and concern).
• While the AAII decline doesn’t tell us that the recent period of malaise in the stock market is over, we do think this deterioration in sentiment is actually good news for the stock market longer term. Over time, 12-month forward returns in the S&P 500 from the current range of this indicator have averaged 10.6%. This is a slightly better return environment than the one this indicator was signaling back in early December (8.6%).
• Note that at the time this podcast was recorded, we didn’t yet have data for the end of the year on CFTC equity futures positioning, but what we saw as of December 24th was that positioning had started to come down for S&P 500 futures after hitting new highs.
• Next, takeaway #3: outside of the biggest market cap names in the S&P 500, a number of our valuation indicators have started to contract.
• Frothy sentiment was one of investors’ big concerns in our December client meetings. Extended valuations were another. On the latter, we are starting to see some contraction in the equal- weighted median forward P/E of the S&P 500 …
• and the median forward P/E of the index ex the top 10 names….
clear retreat in the Russell:
• Wrapping up with Takeaway #4, US equity funds flows deteriorated as 2024 came to an end.
quity and bond funds faded as:
• Interestingly, outside of the US, outflows to Western European equity funds persisted, but their intensity lessened.
• Within US equities, December trends that jump out to us include volatility in US growth and value flows, …
• volatility in US Large Cap passive flows, improvement in US Large Cap active flows, ….
• and weakness in Small Cap flows (both active and passive).
• Another thing that jumped out to us was the very dramatic late-year fade in flows to developed markets’ momentum funds.
That’s all for now. Thanks for listening. And be sure to reach out to your RBC representative with any questions.
