How to invest when the stock market picks up: Lori Calvasina, RBC

  • Lori Calvasina, RBC’s head of US equity strategy, says stocks are expected to rise through the end of the year.
  • Calvasina says that after retesting its March lows, the S&P 500 is expected to rally back to 4,860.
  • She deviates from the current consensus in several ways and claims that a rise to 5,200 is possible.

It always looks like bad news when a major Wall Street firm cuts its estimates for stocks, but there’s some surprisingly good news in RBC’s latest update.

Head of U.S. equity strategy Lori Calvasina cut her end-of-year target for the S&P 500 from 5,050 to 4,860 due to soaring bond yields, and said stocks are expected to fall immediately. But she also said most of the fears investors have reacted to in recent months are now being addressed.

“At the March 8 low – which stocks look set to retest – sentiment has already priced in many of the challenges that stock market participants have faced,” she wrote in a recent note, adding that it helps explain why US stocks haven’t crashed on lingering worries about inflation, rising interest rates, slowing growth and war in Ukraine.

“The P/E contraction seen on March 8 was consistent with the multiple contraction seen in previous Fed tightening cycles,” Calvasina said. “Like many other things associated with pandemic commerce, it just seemed to be happening with a vengeance over an accelerated time frame.”

Even after lowering its estimates, Calvasina expects a recovery of around 14% for the US benchmark over the course of 2022.

“We believe US equities should continue to enjoy safe-haven status for a while longer,” she wrote.

The new target of 4,860 is based on the average of a series of patterns, but Calvasina wrote that one pattern suggests stocks could rebound more than 20% by the end of the year, with another suggesting a year-end surge to 5,259.

It is “the number implied when we incorporate the average rebound from growth lows such as 2010, 2011, 2015-2016 and late 2018, which recent trading has mimicked, including the latest bout of weakness,” he said. she writes.

Most of RBC’s models based on economic momentum and stable valuations are equally bullish, although others are much more bearish. The more bearish model “incorporates the average P/E contraction seen over the past five Fed hike cycles,” along with heightened geopolitical risks, and indicates that the S&P 500 could fall just below 4,400 d end of the year.

Don’t Forget Growth Stocks Yet

In the note, Calvasina goes against a consensus that has been developing on Wall Street, writing that she now prefers growth stocks over value stocks.

Growth stocks are expected to post above-average growth over the long term, and they tend to trade at higher multiples based on traditional metrics such as price-earnings ratios. Experts generally believe that these types of stocks are more vulnerable when interest rates rise.

But that aligns with Calvasina’s view that a lot of bad news is basically priced into US stocks at this point, and she says that’s consistent with both US stocks and growth stocks overperforming. She writes that economic growth forecasts for the United States are improving, while expectations of a


in the EU are on the rise.

“When US stocks outperform non-US stocks, growth tends to outperform value in the US,” she said, adding that after the Fed started raising rates and economic growth slows, growth also usually prevails.

“Despite the return to value momentum in April, we continue to be more intrigued by growth than value going forward,” she wrote. “We see defensive sectors already overvalued with poor earnings revision trends and low quality profiles.”

Calvasina also argues that after all recent sales of US Large Cap Tech Stocks, they now trade at “modestly attractive valuations” relative to the market, while analyst estimates for these stocks are favorable relative to other sectors, and their quality – measured by factors such as the health of the balance sheet and earnings stability – looks good. They also face less ESG risk and less risk from the war in Ukraine.

She is also optimistic about finance due to trends in their valuations, earnings and quality, but says there is less cause for optimism for small caps, another hard-hit area, as slower growth is not good for this part of the market.

RBC is also particularly bearish on communication services companies and real estate trusts.

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