It's normal for equities to have a tough time around Fed transitions, says RBC's Calvasina
Stock markets have been bumpy lately.
It's been another choppy week in markets, featuring a rebound in the artificial-intelligence trade, highly divergent share price reactions to big tech earnings, and more volatility in oil as the U.S.-Iran war flares up again.
Market uncertainty about the new Federal Reserve Chair Kevin Warsh's commitment to tackling inflation has also caused tremors, pushing up long-term borrowing costs to 19-year highs, and rattling stocks along the way.
However, Lori Calvasina, head of U.S. equity strategy at RBC Capital Markets, says it's common for markets to have a tough time around leadership transitions at the Fed. And besides, RBC's midweek examination of its models shows a "valuation opportunity is opening up in the U.S. equity market," she adds.
There are several reasons for this assumption. The first positive factor RBC found was that the forward price-to-earnings multiple of the U.S. stock market relative to non-U.S. developed markets has fallen back to levels not seen since late February, just before the start of the U.S.-Iran war.
"We think AI fears were largely responsible for the relative P/E compression seen late last year, setting up for a defensive trade back into the U.S. after the U.S. strikes on Iran occurred," says Calvasina. The indicator is now back below its long-term average, suggesting U.S. stocks are relatively cheap.
Calvasina also looked at the next 12-month price to earnings (NTM P/Es) of the major U.S. indices, which she described as "starting to look reasonable again." Particularly of note is that the NTM P/E of the S&P 500 SPX is now close to its past few major lows.
"This is also the case for the NTM P/E of the Nasdaq-100 , which is also back down to its long-term average. Meanwhile, the NTM P/E of the Russell 2000 RUT has finally broken slightly below its post-GFC average," says Calvasina, referring to the global financial crisis of 2008.
A third support for the market is that the technology sector is "now looking slightly attractive," according to Calvasina. In RBC's model, tech includes semiconductors & semi equipment, hardware and software, but not the big internet names, which are in communication services.
Tech is below its long-term average on both a relative P/E vs. the broader market and an absolute P/E that looks at the sector relative to only its own history. Indeed, software stocks are well below their own long-term average on an absolute median P/E measure, Calvasina observes.
"Overall, our modeling is telling us that despite the potential pressures on the P/E multiple from higher rates and inflation, there is still a path higher for stocks over the course of the next year due to strong earnings growth, a solid GDP backdrop, and subdued sentiment, which has left room for stocks to climb the wall of worry," says Calvasina.
RBC sees the interest rate backdrop as the biggest risk, but they maintain their 12-month S&P 500 target at 8,150.
The markets
U.S. stock-index futures (ES00) (YM00) (NQ00) are higher as Treasury yields BX:TMUBMUSD10Y dip. The dollar index DXY is up, as oil futures (CL.1) slip and gold futures (GC00) trade around $4,110 an ounce.
Key asset performance Last 5d 1m YTD 1y S&P 500 7437.63 0.40% -0.61% 8.65% 17.32% Nasdaq Composite 25,122.18 -0.06% -2.75% 8.09% 18.94% 10-year Treasury 4.667 -2.00 17.70 49.50 44.20 Gold 4109.6 1.33% -1.86% -5.14% 20.30% Oil 83.19 -8.05% 21.52% 44.91% 23.68% Data: MarketWatch. Treasury yields change expressed in basis points
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The buzz
Apple shares $(AAPL)$ are sliding after solid earnings could still not support a stock that had run up 19% in the past three months.
Amazon stock (AMZN) is jumping after earnings showed robust growth in its cloud business.
Tesla $(TSLA)$ is weighing the sale of its China business to pave the way for a potential SpaceX $(SPCX)$ merger, according to the Wall Street Journal. CEO Elon Musk called that "absurdly fake news" on X.
South Korea's stock market KR:180721 rebounded 17.9% after heavy losses in recent sessions.
ExxonMobil $(XOM)$ and Chevron $(CVX)$ will release earnings before the opening bell.
The Bank of Japan left interest rates at 1% and the yen (USDJPY), which surged Thursday on apparent intervention, jumped briefly again Friday on rumors of more buying by the government.
U.S. economic data due Friday include the employment cost index for the second quarter, released at 8:30 a.m. Eastern, followed at 10 a.m. by the final reading of July consumer sentiment.
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The chart
Vanda Research has estimated the exposure commodity trading advisers - systematic, trend-following hedge funds that typically place bets in the futures market - had to the S&P 500 E-mini futures (ES1) midweek. "CTAs remain net long and close to key sell triggers, with a move below ES1 7,310/20 likely to accelerate any systematic selling," says Vanda. "Bottom line is that without a meaningful rebound, systematic investors could quickly become the market's next marginal seller," they add.
Top tickers
Here were the most active stock-market tickers on MarketWatch as of 6 a.m. Eastern.
Ticker Security name AMZN Amazon AAPL Apple MU Micron Technology NVDA Nvidia TSLA Tesla MSFT Microsoft SPCX SpaceX TSM Taiwan Semiconductor Manufacturing META Meta Platforms AMD Advanced Micro Devices
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-Jamie Chisholm
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