00:00An equity update right now. We do that with Lori Calvacina, head of U.S. Equity Strategy at RBC Capital
00:07Markets.
00:07She threatens society with a 70-page PowerPoint.
00:10I'm looking at it right now.
00:11She calls it a deck.
00:12Yep.
00:12It's not a PowerPoint. It's not cool anymore.
00:14No, that's not it.
00:15Lori, what's the newest, freshest chart in the dreaded Calvacina deck?
00:21Oh, don't say dreaded, Tom. I think it's got some fans.
00:24And honestly, people who don't want to read the deck, I think it's 108 pages right now.
00:29So they can listen to the podcast. It's like five minutes.
00:32It's a podcast.
00:33But no, I think, you know, if I look back on recent client meetings, I would say the one we've
00:38been talking about the most actually looks at how the S&P 500 performs after a new Fed chair takes
00:44over.
00:45And what's interesting about that is if you look at Warsh, when he took over in late May, the S
00:50&P 500 essentially traded sideways until we got to this month and we kind of, you know, had to move
00:54higher.
00:55But we initially put this chart together, you know, kind of right at the end of July.
00:59And we actually went back and looked at Powell, Yellen, and then Bernanke.
01:03And I got creative with the colors on the chart.
01:05Bernanke was in blue, Yellen was in yellow, and Powell was in purple.
01:09But we looked at their performance, you know, the stock market performance a year after they, you know, took over.
01:15And we did it on a daily basis.
01:17And so what we found was that Warsh's three predecessors, the stock market was extremely choppy those first few months
01:23as well.
01:23Bernanke and Powell, if you go a little bit deeper into their first years, stock market was actually in the
01:28red for a decent period of time.
01:30But guess what?
01:30If you look at all three of them, the stock market was higher a year later after they walked in
01:35the door of the Fed.
01:36See, the price, she didn't do this right.
01:38I mean, if you're going to do Powell in colors, you got to do Grateful Dead tie-dyed, crimson red,
01:44cobalt blue, lemon yellow, emerald green, deep violet, and bright orange.
01:49Oh, okay.
01:50So, Lori, I'm looking at your deck, and apparently you were in Australia last week meeting with investors.
01:56I mean, that's a whole other side of this planet here.
01:59Do they think about the markets any differently than we do?
02:02Do they have any special concerns?
02:05Yeah, so it was week before last, and we put out the recap middle of last week.
02:08I will confess I'm still dealing with some jet lag here.
02:12Not time zone changes are not my friend.
02:15But it was a fantastic week, you know, client meeting.
02:18Someone joked they thought I saw basically every investor in Sydney.
02:22But the reality is that we talked about three topics, right?
02:25One was interest rates, inflation, and the impact on equities.
02:29Another was midterm elections.
02:30And then the third was the rotation trade.
02:33And I would say, you know, on the Fed, you know, I think there was sort of a lot of
02:37confusion.
02:37We walked them through that chart I just mentioned.
02:39You know, really tried to calm people down just a little bit and say it's not unusual, right, to have
02:44some indigestion when you get a new Fed chair.
02:46On the midterm elections, it was viewed as a risk.
02:49I would say that when I talk to non-U.S.-based investors, my Australian clients sound a lot like my
02:55European clients or my Canadian clients, where they do tend to view the midterms as the risk factor.
02:59We get less of that when we talk to people based in the States, though it is coming up in
03:03conversations a bit more lately.
03:05And then, you know, looking at rotation, I would say the Australian community really seemed to be in the rotation
03:11camp looking for value, non-U.S. to lead.
03:14Of course, since the bounce back in late July, the opposite has happened.
03:18So it felt like they were sort of fighting the performance.
03:20But if you looked at their flows, and we did that when we came back, we are actually seeing better
03:25flows to Europe than the U.S. from the Australian-based equity funds.
03:28Laurie Calvacino with us across America.
03:30Good evening across Australia from Perth over east.
03:34I think it's east to Cindy.
03:36Well, Laurie, I'm looking at long-term bonds unravel.
03:40Price down, yield up.
03:41I got an Australian 30-year from the pandemic.
03:45Excuse me, Australian 10-year going from 1% to 5%, buttressed up the new highs.
03:51What do long-term bond higher yields mean for stock market participants?
03:59So it's a great question, Tom.
04:01And I'll tell you that the bias in Australia was they thought even our interest rates here in the U
04:05.S. were destined to go up.
04:07They thought the Fed was going to hike.
04:08Again, my conversations were before that NFP report that kind of, you know, threw some cold water on that idea.
04:15But that was really kind of the mindset they were in.
04:17What I told them is what I've been telling U.S. investors, which is whether you're looking at it through
04:22the lens of the 10-year yield or the Fed hiking, potentially, the U.S. equity market can handle a
04:27little.
04:27It can't handle a lot.
04:29And so, you know, basically our modeling suggests we can handle, you know, sort of up to four hikes from
04:34the Fed in a 12-month time frame.
04:36So, you know, sort of spread out over that 12 months.
04:39Or that, you know, 10-year yields that, you know, stay below 5% but, you know, don't necessarily go
04:44down from here.
04:45We think we can also handle that.
04:46And if you think about sort of inflation, interest rates, the Fed, all those things moving up puts pressure on
04:53the P.E. multiple.
04:54But the earnings outlook is so strong, it can really offset that pressure.
04:57And so that's what we really, you know, we're kind of walking people through is where is that tipping point.
05:02So what we're not talking about a lot, I think, is valuation, Lori.
05:07I mean, is that just simply because earnings have been so strong that valuations really aren't that much of a
05:12concern at this point?
05:13Yeah.
05:13My charts, honestly, in the aforementioned 108-page deck, the valuation charts are really not that interesting right now.
05:19And that's, I think, probably a good thing.
05:21You know, we had seen at various points earlier this year that whether you were looking at the S&P,
05:26the NASDAQ 100, S&P top 10 market cap names, which is a good proxy for the AI trade, or
05:31even Russell 2000 right before the reconstitution.
05:35But you've had various points, right, where we were sort of at the high end of the post-COVID range.
05:40And then we've had other points where we're sort of at the low end of the post-COVID range or
05:43getting close to it.
05:44Some of those charts keep making higher and higher lows.
05:47But the reality is things look fine on the valuation data right now, neither frothy nor washed out.
05:52So they're not terribly interesting charts, but that does give the equity market some room to move up.
05:57And I do think that that is, you know, a function of a couple things.
06:00It's one, again, this higher rates and inflation environment that people are anticipating does put some pressure.
06:06Geopolitical uncertainty, when that rises, puts some pressure on the PE.
06:09But at the same time, we've got this dramatically strong earnings environment, and the forecast just continue to get ratcheted
06:14up.
06:15Do you model that out into 2027?
06:18So with our one model that we use as part of the derivation of our price target, we just, the
06:25brilliantly creative name, Evaluation Earnings Model, not that interesting.
06:29But we do model that in right now to 2Q27.
06:33And we actually take the bottom-up consensus earnings, haircut it by 10%.
06:37Your typical haircut is about 8%.
06:38So we're doing a little bit more than that.
06:40And then we're still modeling in, this is for 2Q27, but we put in 3% on CPI.
06:46We put in two hikes, and we put in 475 on 10-year yields.
06:49So we get a bit of multiple compression.
06:51But that model, which I would argue is really, really conservative at this point, can put you to 8043.
06:56Other models that we have go higher, you know, up into the 83, you know, 100-plus type range for
07:02the S&P.
07:03So our target is actually 8150.
07:05But we've really been using that model to say, put everything you're afraid.
Comments