RBC Capital Markets Lori Calvasina joins Yahoo Finance Live to discuss retail investor sentiment, economic uncertainty, Fed rate hikes, midterm elections, volatility, and the outlook for markets.
Video Transcript
JULIE HYMAN: Let's continue our conversation now about the markets and what's weighing on equities, and what might get people interested to get in here. That's RBC Capital Markets Lori Calvasina, who's joining us right now. Lori, good morning. It's good to see you.
So you just heard our conversation that we were having. You've been hearing about some of your peers on the street that have been lowering their forecast for year end. That dramatic comment from Bank of America, that sentiment is the worst it's been since the financial crisis. What are you hearing? Are you-- are you seeing that kind of negative sentiment also?
LORI CALVASINA: Well, sure. And I mean, just to pick up on the Bank of America comment, like, we don't really track the flows, but we do track the sentiment as tracked by the AAII net bull bear survey. And we've actually been talking for a few months now how if you look at that survey, retail investor sentiment has been tracking down around financial crisis lows. So to be honest, that's not really new news in here.
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And I think that as you navigate this environment, I like the Goldman comment about this being an unusually murky environment. I think we've got this challenge from the Fed on interest rates. We've got this murky economic impact. People certainly have their opinions there, but there's definitely a disconnect between expectations and what's going on in the here and now.
And then if you think about maybe potential things that could turn this market around by year end, I'd say, look at the midterm elections. That was something that investors were getting quite excited about over the summer thinking the Republicans were going to have a good showing. Typically as well, we tend to see that markets bottom in early October in a midterm election year, and then rally about 7% into year end. Now that's an average.
But we did hear quite a few investors talking about that over the summer, even back in June and July when they were still pretty bearish and markets were kind of dancing around those June lows. So I would say keep an eye on the election as we get closer. The kind of consensus that the Republicans are going to do well has been getting chipped away at.
My hunch is that the Republicans are still at least going to take the House and that may end up being good enough for investors just to give them something frankly to latch on to at a time when valuations are probably going to start to look interesting again.
BRAD SMITH: Yeah, it's always particularly interesting how the markets may cheer on logjam in Washington DC or nothing happening because that just being kind of a neutralizing effort. However, I think on the other side, there are so many investors, even with kind of the neutralizing if you were to see logjam in DC or even more of a stalemate in DC, there's a larger question of where some of the efforts that have already been moved forward in order to make sure that there are significant changes made.
Whether that be in energy infrastructure, or whether that be in electric vehicles, or in chip manufacturing, and kind of quelling for some of the supply chain concerns. When that will actually start to show up for companies and be a net benefit for the major equity players that are out there that are looking for some of those supply chains to ease as well?
LORI CALVASINA: Well, I think on the topic of supply chains, I wouldn't so much focus on Washington and anything that's being done there. But I think if you look at our digital intelligence strategy team's work, they've been tracking a number of different indicators on supply chains that do show that things are getting better.
Freight rates are starting to track down year-over-year. And if you just look at company commentary, a lot of companies are saying that while things are still tough versus history, they are starting to get better out at the margin.
I think we had one company at our industrial conference say, everything's looking better on supply chains a little bit except for semiconductors. So I do think those things are starting to work their way into the system, regardless of what goes on in Washington in the future. And I think it will take a little bit of time for those to show up in the data, on the earnings side in particular, but I do think the wheels have started to turn there.
JULIE HYMAN: You said in your latest note, which was your weekly notes, so it came out I believe last Sunday, the valuations were starting to look interesting. And I guess if you liked valuations at the beginning of the week, you like even more at the end of the week when stocks that have fallen by 3%. But I am curious if that calculus changes at all given what we heard from the Fed?
LORI CALVASINA: So when we look at valuations, you know, I think you look at the multiples separately, then you look at the interest rates, and then you can bake them all together. But if you just look at multiples on their own and where we've been tracking, there are a bunch of different ways you can track the PE.
If you take a PE against this year's earnings and our estimate of 218, which is pretty far below consensus, we were starting to track a little bit below average at the end of last week, if you look at the long-term average in terms of how you crunch that particular multiple. Now if you look at where the market has been trading against next year's earnings and they were at 212, so we're also materially below the consensus.
We're one of the lowest numbers on the street there. You are still a little bit above average, but we calculated that you would be getting below average if the S&P hit about, I think, 3561. So we're not quite there yet, but I think that is one marker you can keep in mind as you continue to see markets sort of seize up in terms of the volatility in the very short-term.
And I bring that up, Julie, because when I talk to investors over the summer, again, kind of thinking back to kind of the June lows, people were not telling me that they wanted to see dramatically lower valuations. They wanted reasonable valuations, but they wanted some certainty.
Now if you layer into the Fed, I have been talking about this all week with investors, interest rates are a good rough tool to tell you where kind of the right neighborhood valuation should be in, but they're not a very precise tool. So one model that we have that actually looks at core PCE, if you sort of bake in 4 and 1/2 percent, which I think is what was actually in the Fed's summary of economic projections.
And that's been kind of the consensus number in Bloomberg for a while. If you take that, plug that into a regression and look at data going back all the way to the '60s, it tells you we should have a six times average trailing PE in the S&P at the end of the year. And that's actually pretty similar to what a lot of investors were telling me over the summer they thought was a reasonable multiple to pay.
So I do know that there's a lot of concern over interest rates right now and how it weighs on multiples, but I will tell you, it's a wait, but it is a very imprecise tool. It's a very blunt tool, not a precise one.
BRAD SMITH: Lori, just while we have you. I mean, we're about to go into the next earnings season just about two weeks from now essentially. And I think about all of the companies that have either already kind of dampened what their outlook may look like for the rest of this year or just where they're reiterating some of their guidance for some companies.
But largely we've already seen materials companies come out and kind of decrease their guidance, decrease their outlook. We heard from FedEx earlier this week and through their earnings yesterday describing the macroeconomic outlook as well. What are your expectations going into this earnings season? And what should the results that-- be that we expect coming out of it?
LORI CALVASINA: Sure. So our number, again, this year is at 218, and I think the bottom up consensus has been tracking around to 228. So there is definitely a disconnect. And we do think numbers need to come down.
I would say, reporting season gets lumpy sector by sector. We're probably going to hear from a lot of financials first and industrials. Again, the tone out of our industrial conference last week was very, very positive. So I think if you hear anything other than that it is going to be a negative shock to the system.
The financials, though, if you look at the setup coming in, we've been seeing pretty healthy rates of upward revisions, especially for small and mid-cap banks. So again, you know, I don't necessarily expect anything to be bad there. But if we were to sort of see some negative commentary come in, I think that would run counter to the trend that's been in the market recently.
Look, I think that investors want earnings numbers' kitchen sinked. They want the Band-Aid ripped off. They want realistic numbers for next year, and this year frankly, so that they can really make a true assessment of valuations. So while there might be some short-term volatility just if we work some of these expectations down, I do think ultimately that's healthy for the market.
BRAD SMITH: RBC Capital Markets, Lori Calvasina. Lori, always a pleasure to speak with you and get your perspective on what's taking place more broadly here. Appreciate it.