Lori Calvasina, Managing Director, Head of US Equity Strategy, RBC Capital Markets

Lori Calvasina · RBC Capital Markets

RBC's official S&P 500 fair value is about 8,150 on haircut EPS and 5% yields.

Her model regresses the S&P 500 P/E on CPI, the Fed and ten-year yields, using history back to 1962, then applies that P/E to bottom-up consensus EPS cut by about 10%. The base case assumes 10-year yields at 5%, three more Fed hikes and inflation around 2.75%, which gives the fair value. A stress test adding another hike, 3% inflation and a 5.25% 10-year gives about 7,900. The EPS haircut rose from 5% in early summer to 10% as war and AI-earnings worries grew.

“That PE output, if you marry it up with the consensus earnings, [cut] by 10% again, gets you about $81.50 [likely 8,150] and the S and P 500 is fair value. So that's our official price target right now.”at 5:04

Lori Calvasina · RBC Capital Markets

Expects another 5-10% S&P drawdown; a break below 10% has usually meant falling to about 14%.

Her drawdown tiers are: garden-variety pullbacks of 5-10%, then 14-20% near-miss recession scares, then recessions with median drawdowns of 27-33%. Since the GFC, a break below 10% has typically gone to about 14% with little in between. Across drawdowns over 10% since 1956, the median is 22% and the average 26%. The 2022 drawdown of 25% fits tier three, which she says shows the framework works.

“we are looking for another five to 10% drawdown in here.”at 10:07

Lori Calvasina · RBC Capital Markets

Healthcare upgraded to overweight; it hedges AI and tech exposure, per analyst survey.

Valuations, flows, earnings and sales revisions all look good for healthcare. In a quarterly analyst survey, US analysts were neutral, and global analysts were much more bullish. Asked about 5.5% ten-year yields and an AI slowdown, healthcare scored among the better sectors. On the AI slowdown question it was the clear most bullish outlier, so analysts see it as a hedge on AI and tech. Nothing aligns perfectly across indicators, but this was the only idea that made sense across the data.

“the clear most bullish outlier was the healthcare sector, where our analysts have really come to understand that that sector is starting to serve as a hedge on the AI theme and on tech performance in particular.”at 24:30

Lori Calvasina · RBC Capital Markets

Consensus EPS looks too high; RBC haircuts it about 10% as hedges and inventories roll off.

Companies hid Iran-war impacts last reporting season, but hints are now surfacing. One food and beverage company's hedges are starting to roll off, and a company said that if oil stays above $100 it becomes a problem. Hedges must be reset at higher prices and depleted inventories rebuilt at higher prices, which points to downward estimate revisions. Analogues from 2018-19 and 2022-23 show consensus drawn down in the second half once companies stop managing through. Her 2027 estimates are a key risk because they may be too high.

“We think there's room for some downward estimate revisions just on the basis of that kind of thing. And that's one of the reasons why we are modeling in that 10% haircut into our own model.”at 16:26

Lori Calvasina · RBC Capital Markets

Macro variables stopped forecasting S&P margins around 2015-16 as tech margins expanded, so RBC models companies bottom-up.

She discontinued her top-down S&P 500 earnings model because she could no longer be intellectually honest about forecasting margins. Macro variables stopped explaining margins around 2015-16, when tech margins began expanding enormously relative to the rest of the index. She ties this to secular productivity, software and automation gains that also spread beyond tech. Concentration makes top-down margin forecasts unreliable, so RBC now builds the earnings view company by company.

“the ability of kind of macro variables to forecast margins had broken down around twenty fifteen, twenty sixteen, and that's when we really started to see an enormous expansion in tech margins relative to the rest of the index.”at 17:58

Lori Calvasina · RBC Capital Markets

Major drawdowns follow outright earnings contraction, not just slowing; her base case is slowing, not contraction.

In her drawdown work using NIPA corporate profits data, major drawdowns were associated with outright contraction in growth, not just slowing growth. She contrasts cutting trailing earnings growth from 21% to 9%, which she considers a normal slowdown, with cutting it from +21% to -5%, which would be the nefarious territory. She says she is not making the latter cut. Non-US investors are more worried that consensus already expects growth to slow and that the cuts could hurt the market. US investors push back when she cuts bottom-up consensus by about 10%, but she thinks consensus may be a little high, though not by much.

“it's not just slowing growth that tends to be associated with those major drawdowns. It's outright contraction in growth.”at 48:30

Lori Calvasina · RBC Capital Markets

Ten-year yields are near but have not crossed the tipping point for equities.

Recent ten-year yield moves of more than 100 bp resemble the late-2024 rise, which the market essentially ignored. Modest yield increases in late 2023 and early 2024 still produced 5-10% equity drawdowns, so the size and starting point of the shift matter. The 2021-22 move of about 300 bp was a dramatic repricing. P/E multiples have usually been inversely correlated with CPI, the Fed and ten-year yields.

“everyone wants to know where the tipping point is on ten year yields. I can't give you a single number, but we do think we got close to it but didn't quite cross it.”at 6:49

Lori Calvasina · RBC Capital Markets

Back-end yield moves have no consistent driver; oil and other links keep breaking down.

After the recent drop in yields following the CPI print, her rates team pointed to AI concerns and risk-off flows pushing money into Treasuries. Calvasina had thought oil was driving yields and added it to her weekly deck, but the correlation then broke down. She concludes that the drivers are inconsistent from day to day and that it is a bit of everything. Several relationships are converging, so the team has to monitor many inputs instead of relying on one.

“Maybe there were some risk off flows and that's driving people back into treasuries. So I think the drivers from what I can tell are not consistent day to day, that it's a little bit of everything and you've got to keep an eye on it.”at 40:18

Lori Calvasina · RBC Capital Markets

Midterm elections tend to create major market volatility, as 2018 and 2022 showed.

The midterms sit alongside the long Iran war and rate risk as one of her four risks to the market. She points to 2018 and 2022 as midterm years that brought tremendous volatility. She treats the election as a catalyst for a further 5-10% pullback.

“we talk about the war has gone on longer than anticipated, the midterms ... that tends to create tremendous volatility if you look at 2018 and 2022.”at 10:07

Lori Calvasina · RBC Capital Markets

Midterm sweep outcomes have only modest market impact, working mainly through sector repositioning.

Calvasina's team surveyed US analysts twice this year on a -2 to +2 scale for midterm scenarios, and analysts had to tie each view to a policy relevant to their industry. A Republican sweep scored a modest positive, below +0.5. A Democratic sweep scored a modest negative, and a split Congress was essentially neutral at about 0.09. Sector-level views are where the differences show: a Republican sweep is seen as positive for utilities (AI data center affordability), and for financials and energy (regulation). Healthcare is positive under a split because of legislative gridlock. Consumer staples are negative under a Republican sweep. Prediction markets show the Republican-sweep odds fading and the Democratic-sweep odds leveling off. She expects the main effect to come from repositioning beneath the index level, not from the headline S&P 500 move.

“I think at the end of the day for the equity market, it comes down to repositioning. Right? Probably more under the surface than above the surface.”at 42:12

Lori Calvasina · RBC Capital Markets

Expects the Fed to deliver about three more hikes, and wary of pushing too far and stalling capex.

Her base case assumes three more Fed hikes, and a stress test adds a fourth alongside 3% inflation. A study of economic indicators in hiking cycles shows capex indicators can stall during hikes. She wants to make sure the Fed does not push too far and stall the capex recovery.

“We're certainly baking in a few more into our models.”at 35:39

Lori Calvasina · RBC Capital Markets

Current hiking cycle likely milder than 2022; markets price the initial shock, then move on.

Calvasina re-ran the mid-1990s hiking cycle alongside 2022-23. The 1994-95 and 2022-23 cycles had chunky hikes, averaging about 45-49 basis points per move. Other cycles averaged about 25-29 bp, mostly regular 25 bp moves. In the chunky cycles the stock market fell about 10% early and only recovered after a long time. In the milder cycles the market took an initial shock, priced it, and then gained through the rest of the cycle. She argues the current environment resembles the milder pattern, as with tariffs in 2025, when the market priced the shock and moved on quickly.

“And so you had an initial shock, you priced it, and then you moved on. That kinda sounds to me like the market environment we're in today, especially if you look around tariffs last year.”at 38:12

Lori Calvasina · RBC Capital Markets

Hyperscaler capex is plateauing while the rest of the S&P 500 is just starting its capex recovery.

RBC decomposed S&P 500 capex and found the top-10 market-cap names, which are the hyperscalers and AI leaders driving the cycle, at peak levels and possibly leveling off. The rest of the index is in the very early days of a capex recovery. ISM new orders, which lead capex by a few quarters, are in early recovery even though they have stalled a little. The question is whether the rest of the market can catch up, and the Fed must not push hikes so far that it stalls that recovery.

“These are the ones who have been driving the overall cycle. They are up to those peaks... And that does look like it might be leveling off just a little bit. If you look at the rest of the market, we're in very early days of a CapEx recovery.”at 12:38

Lori Calvasina · RBC Capital Markets

A longer Iran war is a key risk as companies' hedges and inventories run out.

Early in the war, companies said they had inventory and hedges to run through, and that they could manage until the end of the summer. The war has now run longer than expected, and some hedges are starting to roll off, which forces resets at higher prices. Companies had been reluctant to discuss the impact, but that is starting to change. A war that drags on is one of her four top risks to the market.

“I think that companies hid from the Iran war issue and how it's impacting them... We've got hedges in place... Guess what, guys? We're here. And now it's time to talk.”at 15:09

Lori Calvasina · RBC Capital Markets

Top-10 S&P stocks show no market-cap premium over net income, so she is not in the AI bubble camp.

At the 2000 tech-bubble peak, the top-10 market-cap share ran about 10 points above their net-income share. She sees no such gap now, and the gap was narrower at various points over recent years. The market is not paying a premium for these companies' earnings. That could mean undervaluation or doubt about the earnings figures, but either way the bubble comparison does not hold for her.

“And right now, there's no gap. So the market's really not giving you any kind of premium. ... I'm just not in the bubble camp because of that.”at 20:05

Lori Calvasina · RBC Capital Markets

Pulled tech overweight: semis valuations stretched again and earnings revisions decelerating.

RBC upgraded tech in mid-July after a positioning unwind in semis and solid earnings revisions. The sector has since become expensive again, and semis earnings revisions have started to decelerate. RBC therefore removed the tech overweight and moved the money into healthcare.

“it's gotten expensive again. And semis earnings revisions have started to decelerate. So we pulled the overweight off.”at 23:06

Lori Calvasina · RBC Capital Markets

Energy rated neutral: cheap valuations and good revisions, but oil-driven and fickle.

Energy valuations are good, especially in large caps, and earnings revisions look good. Flows have not yet picked up despite the Iran war's second act, and analysts are bullish. Energy trades on war headlines and oil prices, and revisions track oil moves, which makes the sector feel fickle. That has kept RBC from upgrading on a six-to-twelve-month view. Some investors who avoided energy for years over climate mandates are now being forced to look at it again, which is positive for the space.

“it does feel very much like a sector that's driven by war headlines and oil prices. ... that's an indicator that feels a little fickle to me. So we haven't really had the conviction to upgrade it on a six to twelve month view.”at 26:49

Lori Calvasina · RBC Capital Markets

Deficit worries are a constant criticism that equity investors largely discount; she fades it most.

Calvasina says equity investors do not focus much on the deficit. In her view it is a steady criticism that is always present regardless of market conditions, so it does not explain why yields or markets moved recently. She acknowledges that fixed-income investors may weigh it more heavily, and says she cannot judge how important it is to them. From her equity seat she fades the deficit argument more than any other driver in the rates debate.

“I do personally from my seat feel like that's not something equity folks tend to focus on all that much in our world. ... I think that's the one that I probably fade the most to be honest because I just think that concern is always there.”at 40:51

Lori Calvasina · RBC Capital Markets

Investor mood is not crazy bullish; US sentiment is sour, and non-US investors fret about midterms and AI capex.

AAII retail sentiment has been fairly sour, and she thinks the survey dovetails with what she hears on the road because it reflects a relatively well-educated retail investor base. Her recent US client meetings also suggest a sour mood. She says investors are not crazy bullish. On her latest trip, non-US investors were more concerned about midterms and AI capex than US investors were. She attributes the gap to non-US investors being more macro-oriented, paying more attention to political and interest-rate risk, while US investors focus on earnings and bottom-up stock picking.

“I wouldn't say people are crazy bullish right now by any stretch.”at 47:24