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RBC trims S&P 500 year-end target to 4,700

Mon, 6th Jun 2022 17:17

June 6 - Welcome to the home for real-time coverage of markets brought to you by Reuters reporters. You can share your thoughts with us at

RBC TRIMS S&P 500 YEAR-END TARGET TO 4,700 (1215 EDT/1615 GMT)

RBC Capital Markets' head of equity strategy, Lori Calvasina, is trimming her year-end 2022 S&P 500 target to 4,700 from 4,860, or a reduction of 3.3%.

The updated target is roughly 14% above current levels.

Calvasina says its fair to say that the U.S. is still in the midst of an outperformance cycle relative to non-US equities. However, she admits that U.S. leadership lost some momentum in May.

If a recession occurs, she says that history suggests that U.S. equities are likely to regain their safe haven status. If recession fears recede, however, and U.S. equity markets continue to recover, the US/non-US call is tougher.

Calvasina remains more intrigued by growth than value, while acknowledging near-term risks to that view. Her concern is that if equity markets take another leg lower and price in a full recession, growth may experience more underperformance. She adds this would defy the historical recession playbook which shows that growth tends to outperform value within the large-cap space during recessions, including the broader market’s drawdown and rebound.

As for small cap vs large cap, Calvasina thinks that the small cap risk/reward has improved and she would "move back to neutral vs large cap," but not overweight just yet.

"If it turns out that the US avoids a recession and the US equity market has bottomed, we’ll look back at Small Cap’s resilience in early 2022 as something telling us stocks had already priced in the economic damage that was around the corner and were attempting to find a floor."

Conversely, she says if recession fears mount and equity markets take another leg down, small cap seems likely to underperform again in the very near term.

"But we’d view that as an opportunity to add to positions. Historically, there’s one thing we know about recessions – they tend to be good entry points into Small Cap."

(Terence Gabriel)


The resilience of the U.S. consumer - the tent pole of the U.S. economy, contributing about 70% to GDP - has given analysts and economists reasons to be cheerful in this gloomy season of decades-high inflation, loss of economic momentum and looming interest rate hikes.

And it's true that despite rather dour recent survey data (The Conference Board's Consumer Confidence and the University of Michigan's Consumer Sentiment indexes), Americans continue to open their wallets, as evidenced by retail sales, personal consumption and outstanding consumer credit data.

Indeed, what the American consumer says and how they behave are two very different things:

Yes, spending is on the rise. But that's largely because everything costs more. And while the American consumer piggy bank was stuffed with trillions amid the worries and constrictions of the pandemic, the saving rate has since plunged below pre-crisis levels.

The saving rate - a favorite indicator of Treasury Secretary Janet Yellen - is often seen as a barometer of consumer expectations, as folks are less likely to open their wallets in times of economic uncertainty.

That relationship has dissolved in recent months:

Some correctly point out that consumers are gaining spending power, offering 5.2% year-over-year wage growth - the freshest print, from last Friday's jobs report - as exhibit 'A.'

The problem is, inflation has been running hotter than wage growth since December. Taken together, on a real basis, the consumer has taken a pay cut.

As shown in the graphic below, the cost growth of many essentials are keeping pace, if not overtaking the rate of rising pay. Core prices - stripping out food and energy items - are nearly one percentage point higher, and grocery prices are growing twice as fast as the average paycheck:

The graphic above has one essential, glaring omission: gasoline. April's CPI report showed gas surging a painful 43.6% from last year, dwarfing all other essential items in the CPI basket.

According to the graphic below, NYMEX RBOB front-month gasoline has quadrupled since the nadir of the health crisis and doubled since just December:

In order to earn those rising wages, folks without public transportation options will have to put gasoline in their tanks, even when their piggy banks start edging toward "empty."

On Friday, the Labor Department is expected to release its May CPI report. Analysts expect annual headline growth to hold firm at a blistering 8.3%, and core CPI growth to ease to 5.9% - still above wage growth.

The Federal Reserve has vowed to aggressively hike the Fed funds target rate in an effort to dampen demand, thereby bringing inflation back down to earth.

While forecasts are mixed regarding whether Powell & Co will cool the economy right into recession, if wage and price growth don't at least reach parity, the economy will lose its tent pole.

Will recession inevitably follow?

(Stephen Culp)


Despite the long list of macro worries, Bernstein notes how margin forecasts remain bullish and reported margins are now above pre-pandemic levels in both the U.S. and Europe.

This, however, appears to be in contrast with the big gap that has opened up between costs to manufacturers and costs to consumers, which means at one point something needs to give, according to strategists at the U.S. investment house.

"Soaring consumer demand and sales need to persist to counter-balance input cost inflation... otherwise it seems a large margin squeeze may be on the horizon, particularly in Europe," they write in research note.

While headline CPI inflation are at similar levels on both sides of the Atlantic, the gap between CPI and PPI in Europe at 28 percentage points is 4 times that of the U.S, they note.

(Danilo Masoni)


Wall Street's main indexes are gaining early on Monday with U.S.-listed shares of Chinese technology companies rallying on optimism around easing regulatory crackdowns and relaxing COVID-19 curbs in the world's second-largest economy.

The iShares China Large-Cap ETF is popping to a nine-week high.

Meanwhile, FANGs and chips are among early outperformers as growth shares have kicked off the week on a strong note. Growth is attempting to outperform value for a third-straight week.

In any event, banks are also posting strong gains. This, as the U.S. 10-Year Treasury yield is once again flirting with 3%.

Apple is gaining ahead of key announcements due at its annual developers' conference WWDC. The event kicks off at 1 pm EDT.

And solar stocks are higher. U.S. President Joe Biden will declare a 24-month tariff exemption on solar panels from four Southeast Asian nations on Monday after an investigation froze imports and stalled projects in the United States, sources tell Reuters.

Here is an early trade snap shot:

(Terence Gabriel)


Conversations about a recession are heating up, with analysts warning that tightening financial conditions will hurt markets, and economists increasingly flagging the risks of a downturn.

The S&P 500 is down 14% on the year, and money markets are pricing in 50 basis point rate hikes by the Federal Reserve next week and in July.

A slowdown in growth looks priced in across the board. However, very few indicators of equity positioning are down to recession levels, argue researchers at Deutsche Bank (DB). Equity fund inflows have slowed but haven't seen sustained outflows, and short interest is still near record lows, their data shows.

Here are two DB charts showing shorts, as a percentage of market cap, hovering at record lows for stocks in the S&P 500 and Nasdaq 100:

Also, over the last three months, buybacks ran at more than $300 billion, while funds saw inflows of over $25 billion, according to DB research.

Further cementing the case for recent fund flow strength, investors put £553 million ($694.3 million) into funds in April 2022, according to data published by the Investment Association, following a £3.5 billion outflow ($4.4 billion) in March.

“After the significant volatility of March, caused in part by the terrible events in Ukraine, investors returned to markets in April,” said Emma Wall, head of investment analysis at Hargreaves Lansdown.

The bright side: Markets are showing some signs of stability. The bad news: With central banks committing to higher interest rates, an ongoing war in Ukraine and surging inflation levels, the outlook looks increasingly challenging.

(Anisha Sircar)


Chinese stocks rose on Monday as both Beijing and Shanghai have been returning to normal life from the biggest COVID-19 outbreak in two years, while measures to revive economic growth helped boost investor sentiment.

With this, U.S. stock index futures are bouncing on Monday, as a report of Beijing regulators concluding a year-long probe into Didi Global, added to the optimism about easing COVID-19 curbs in the country, lifting shares of other NY-listed China stocks.

Of note, despite fresh lows in the S&P 500 in May , the iShares China Large-Cap ETF has so far refused to take out its March lows:

Additionally, in the March-May period, the FXI tested a monthly support line from 2004. Even though, in both March and May, the ETF dipped below this line during the month, the line ultimately held on a monthly closing basis.

Meanwhile, in April, the FXI ended at its most oversold level ever when the RSI closed at 23.37, which was just decimals below its 23.534 trough registered in September 2011. Of note, in the wake of the 2011 oversold RSI print, the FXI ultimately rallied more than 70% into its early-2015 high.

As long as the monthly support line, which resides around $28.25 in June, continues to hold on a monthly closing basis, the FXI looks to challenge resistance in the $33.10/$33.75 area.

Reclaiming the broken support line from late 2008, which now acts as resistance around $35.75 in June, can suggest room for a much more extensive advance.

(Terence Gabriel)


(Terence Gabriel is a Reuters market analyst. The views expressed are his own)

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