00:00Laurie Calvasina of RBC writing the sentiment story has been one of mixed emotions with takeaways varying depending on which
00:06data set one is looking at.
00:08Laurie joins us now for more. Laurie, good morning. Good to see you. Good morning.
00:11Does the bull case stand up to the rate hike debate at the moment?
00:14I think so as long as you have a moderate amount of rate hikes.
00:18We talked about this in our weekly a few weeks ago that whether you're looking at it from the perspective
00:21of the Fed taking their interest rate up or 10 year bond yields moving up,
00:26that when we go back and we look at the history both since 2022 on the bond yield side or
00:31if we look back to 1990 and look at sort of Fed moves over the context of 12 month moves
00:35in the market,
00:36everything in moderation seems like something the equity market can handle.
00:40If you go back to 2021, 2022, we priced in an enormous amount of hikes.
00:45We had a massive move up in 10 year bond yields. It was a real regime change.
00:48We've been sort of stuck in this bond yield environment on the 10 year yield side between sort of 3
00:53.3 to 5 percent.
00:54If we stay contained in that range, I think that we could have some short term indigestion in markets, but
00:59still have a fairly good outlook over the next 12 months.
01:02Similarly, if you go back and you look at how stocks perform in different hiking and cutting cycles, your best
01:08environment is when the Fed does absolutely nothing.
01:10So we can keep our fingers crossed for that scenario. But you tend to get like 13 to 14 percent
01:14returns on both the hiking side and the cutting side when you're seeing moves in the zero to 100 basis
01:20point range.
01:21So as long as we stay, you know, within, say, two ish hikes over the next 12 months of 25
01:26basis points, I think stocks will ultimately be OK.
01:28They may not like it in the short term. Lisa mentioned Deutsche Bank looking for a call.
01:32Rate hikes later this year. Bank of America doing the same. That note just dropped earlier on this morning.
01:36This call, this conversation accelerated by this move in energy. But energy's dropped back to the 70s.
01:41When you speak to the team at RBC, how dependent is the outlook for interest rates on what's happening in
01:47the commodity market?
01:47So Blake Gwynn on our U.S. rates strategy team handles the Fed call for us. He's not currently looking
01:52for any Fed moves, though he has also written that his conviction in that has come down.
01:57And our econ team has talked about how the next move may be a hike rather than a cut. I
02:00think there's a lot of fluidity in the situation right now.
02:03One of the things that came out in my meetings with investors last week is just a lot of uncertainty
02:08is in the air, whether you're looking at the path of the Fed going forward,
02:11how the Fed is going to operate going forward, and frankly also the situation in the Middle East in terms
02:16of what that means for oil prices.
02:17What should your assumption be over the next 12 months? I don't think a lot of people know that, but
02:22that does have reverberations and headline inflation.
02:24One thing that Blake has really emphasized to us internally is that he hasn't really viewed the Fed policy rate
02:30as the appropriate path or the appropriate tool really to combat
02:34any inflation emanating from oil prices. But we do know, of course, that we have inflation emanating from other sources
02:39as well.
02:40What's more important for the equity market, core PCE coming out on Thursday or micron earnings coming out on Wednesday?
02:46I think that this is a situation in the equity market where we have very, very strong earnings tailwinds that
02:52are running up against very stiff headwinds on the P.E. side.
02:55And you tend to get compression in the P.E., right, when you have higher inflation, higher interest rates.
02:59But so far in our modeling, it looks like the earnings story is strong enough to offset those headwinds from
03:05compression.
03:06So I would say right now earnings matter more.
03:08At this point, a lot of people keep talking about that.
03:11And yet you take a look at some of the earnings they've been driven by names that have pricing power.
03:16There is a bit of pushback on the pricing side in a significant way from hyperscalers and from other companies
03:22that are realizing that there are some limits we might be bumping up against.
03:26At what point is that a tension that needs to get resolved that could potentially be a risk factor?
03:30So, look, I think it is something that investors are already thinking about and digesting, which takes some of the
03:35edge off, frankly.
03:37I think we just have to go through reporting season, right, and hear what the latest commentary is from companies.
03:42One of the things we've talked about is the CapEx cycle.
03:45And we're getting a lot of questions on this last week.
03:48A lot of that is hyperscaler-driven, is AI-driven.
03:50If you look at rates of change on S&P 500 CapEx, you're kind of hovering around peak-like type
03:56levels.
03:57But if you X out the top 10 names, we're in the very early stages of the CapEx recovery cycle.
04:01So can you elongate the cycle as you get more companies participating in the CapEx boom?
04:06That's something we have to think about given the tax bill that we saw last year.
04:10So we're still sorting through a lot of these issues.
04:12Are more companies going to be participating when it comes to doing better in the stock market,
04:16given they could put the Iran war behind them and energy prices are moving much lower?
04:21So I'll tell you, Annemarie, last week the Business Roundtable put out the CEO confidence survey that they run,
04:26and we actually saw that tick up.
04:28And it was on the strength of CapEx expectations, sales expectations, hiring expectations were pretty neutral.
04:33But there's just really been a clear contrast between, say, investor sentiment, which has been kind of weak or meh.
04:39It's gotten a little bit better recently, but hasn't been that fantastic.
04:42And then if you look at the corporate side, things are, I wouldn't say they're off to the races,
04:46but are still generally optimistic.
04:48So I think we have to take some comfort from that, especially as we head into this next reporting season.
04:52Can I answer the question? Can I just say Micron?
04:53Yeah.
04:54Right? Micron probably, because I think most economists understand where PCE will probably come in
04:58after seeing CPI and PPI in the last week.
05:01Yeah, and how high expectations are for Micron, given the fact that it's rallied like some 800% in the
05:06past year.
05:06I mean, it's insane.
05:07You start wondering, can they keep having this transfer of wealth coming from hyperscalers to them?
05:11There was a chart showing the divergence of performance between the hyperscalers and the chipmakers, and it's bonkers.
05:16I mean, it just shows what's going on right now, and it feels like maybe not totally sustainable in perpetuity.
05:22Sometimes you just can't please some people, and they'll say things like,
05:25this is as good as it gets, even if it is so good.
05:28Have we seen peak as good as it gets?
05:30So if you look at the rate of upward revisions for either the semiconductor companies or the S&P 500
05:35in general,
05:35it does look like we've sort of hit those peak levels of earnings enthusiasm.
05:40If we looked at the S&P 500, the rate of upward revisions, I think it got to around 89%,
05:4490% recently at the high.
05:46The high tends to be kind of in that 90% to 94% range, and in our latest update,
05:50it ticked down to 86%.
05:51So these are all very good numbers, right?
05:53You're still generally seeing upgrades at a slightly, slightly slower pace.
05:57If you look at the semiconductors, we're still sort of sitting at peak levels of upward revisions.
06:03And so we've been talking a lot to clients about this, because I've talked to a lot of people who
06:05have been in the semis names,
06:07who have been in the AI theme, you know, a fair number of people doing well with that.
06:11But they're saying, maybe I should be looking around at other opportunities.
06:13So we look at that chart, and I say, you know, this is a risk factor.
06:17But I can't just tell you to sit here and hold your nose and sell, because if you go back
06:22and look in the past,
06:23sometimes you sit at these peak levels of upward revisions for multiple years.
06:26So we have to watch how they move in time.
06:29And I know that's not a satisfactory answer.
06:30We're all supposed to have crystal balls in this business and predict what's going to happen six months down the
06:34road.
06:35With certainty and conviction, Laurie.
06:36But I do think in this particular situation, we kind of have to take it day by day.
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