Markets, Earnings, and Oil

Lori Calvasina · RBC Capital Markets

Expects a 5-10% S&P 500 pullback to about 14,400, not a deeper recession-driven selloff.

Calvasina's market call is for a tier-one drawdown of 5 to 10% in the S&P 500, which she says could take the index to about 14,400. She frames this within a four-tier fear framework. Tier two would need recession risk or a new shock to rise, and she does not currently see the seeds of that. So she expects a garden-variety pullback rather than a deeper decline.

“we've been looking for a five to 10% drawdown, what we call a tier one, you know sort of pullback in the S and P 500 that could take you to kind of 14,400.”at 19:49

Lori Calvasina · RBC Capital Markets

Small caps and the broadening trade face risk until markets stop pricing more Fed rate hikes.

Russell 2000 valuations have fallen back to Iran-war lows but are not washed out, so they are cheap but not compelling. Positioning in small caps is more out of favour than in Nasdaq futures, which remain crowded. Calvasina says the real problem for cyclical and small-cap stocks is rate hikes, and the broadening trade could struggle until markets are convinced additional hikes are not being priced.

“the real problem for the Russell and I would say for those more cyclical parts of the stock market and economy are the rate hikes. And you know until we sort of become convinced that we aren't going to be pricing additional hikes small caps and kind of that broadening trade I think could potentially have a problem.”at 23:28

Lori Calvasina · RBC Capital Markets

Russell 2000's high share of unprofitable firms reflects early-stage biotech and tech, not low quality.

Calvasina pushes back on the view that the Russell 2000 is a harbinger of low quality. The share of companies with negative earnings is high, but many are biotech and technology companies, and some may simply be very early-stage. She says it's important not to paint the whole index with a broad brush, since it contains early-stage growth stocks and beaten-down names alike.

“I have pushed back a little bit on people who say the Russell has become just a harbinger of low quality. ... A lot of those are biotech companies. A lot of those are technology companies. ... these may just be very very early stage companies.”at 24:09

Ellen Fraser · Baringa Partners

Attacks have damaged Saudi refineries and energy infrastructure, a major threat to global energy markets.

Fraser says Saudi Arabia can ship crude through the Strait of Hormuz or the Red Sea, which is a geographic advantage. But the country is under attack, its refineries and some energy infrastructure are damaged, and the region's biggest producer is under heavy threat. She calls this a major problem for global energy markets.

“it's under attack and actually its refineries are damaged and some of its energy infrastructure is damaged. The biggest producer in The Middle East is under a huge amount of threat.”at 26:27

Ellen Fraser · Baringa Partners

Repairing damaged refineries takes a long time because of specialist parts, skilled labour and hidden damage.

Fraser says the time to repair a refinery depends on how much damage there is. Refineries are custom-built and need damage assessed, specialist parts manufactured and shipped, and a skilled workforce in place. Stripping a refinery down often reveals additional damage. Using a planned turnaround as a benchmark, she concludes that a damaged refinery cannot be fixed quickly.

“So it's really not a quick thing to turn around a refinery where, you know, actually, might have damage. And even when you look to fix the first bit of damage, as you take to pieces that refinery, you may find additional damage as well.”at 27:48

Ellen Fraser · Baringa Partners

Diesel supply relief from Russia and the IEA release is too small against enormous global consumption.

Fraser says global diesel consumption is enormous, since it fuels transport, agriculture and shipping. Many diesel refineries are stuck on the wrong side of the Strait of Hormuz, which constrains supply. The Russian volumes and the G7-agreed IEA release sound significant but are small in context. She doubts they will make much difference to US markets, and says Russian oil may not reach US markets quickly enough to matter for the midterms.

“I mean, diesel consumption globally is absolutely enormous. ... You've really got to question how much of a difference it's gonna make.”at 29:38

Ed Yardeni · Yardeni Research

US corporate earnings are in a boom, driven by strong revenue growth.

Yardeni says there is no doubt the US is in an earnings boom. He attributes it partly to very strong revenues, with the global economy resilient through a series of shocks. He links revenue strength to S&P 500 revenue results, which supports the earnings picture.

“But there's no doubt that we're in a earnings boom, and that's partly because revenues have been very strong.”at 9:21

Lori Calvasina · RBC Capital Markets

Expects 2027 S&P EPS estimates to be cut, with about a 10% haircut in her model from a longer war.

Companies did not say much about the Iran war in the last reporting season and said it could be over by summer. Calvasina thinks companies will have to bake in a longer conflict, because hedges must be reset at different levels and inventories replenished at higher prices. Estimates after 2019 and 2023 were worked down steadily once conflicts were priced in, and she has baked a 10% haircut into her own 2027 EPS model.

“... we might get if we need to pull 2027 EPS forecast down. In my own modeling I've been baking in a 10% haircut”at 20:59

Ed Yardeni · Yardeni Research

US bond yields are back to normal, not higher for longer, and anchored to nominal GDP growth.

Yardeni rejects the 'higher for longer' framing and argues rates have returned to a normal level after an abnormal period between the financial crisis and the pandemic. His guidepost for where yields should sit is nominal GDP growth. He says that if yields got anywhere close to nominal growth he would worry, but for now they look like 'normal for longer'.

“I don't think it's higher for longer. I think it's normal for longer. We're back to normal rates.”at 3:16

Ed Yardeni · Yardeni Research

China faces deflation and a weak consumer, with bad bank loans unresolved despite recent bank restructuring.

Yardeni points to China's bond yields, which are historically low, as a sign of deflation and of a Japan-style model creeping in. Retail sales growth is zero in nominal and real terms and home prices are still falling. He says Beijing's restructuring of rural banks into large banks does not solve the bad-loan problem, and the credit system has not been fixed.

“They should also focus on what's going on in the bond market in China. Their yield is actually historically low, extremely low. They've got deflation over there.”at 6:20

Ed Yardeni · Yardeni Research

A technology-led productivity boom could lift US productivity growth from about 2% to 3-4%.

Yardeni argues the US is in a roaring 2020s driven by a technology-led productivity boom. Productivity is currently growing about 2% and his base case is that it rises to 3% to 4%. He concedes that sounds delusional but points to previous productivity booms as precedent. Higher productivity would support real growth and is central to his view of the economy.

“I think we are in the roaring twenty twenties with a technology led productivity boom. ... productivity, which is right now growing around 2%, is going to go to 3% to 4%”at 9:07

Ed Yardeni · Yardeni Research

US inflation could moderate over the next few years as a tech productivity boom lifts real growth.

Yardeni says he could see inflation moderating over the next few years. If inflation does moderate and productivity rises, real growth should be stronger, so nominal growth would still be good. This links his inflation view to the technology-led productivity boom he expects.

“I could see inflation moderating over the next few years.”at 9:07

Ed Yardeni · Yardeni Research

Speculative excess is building in AI-related financing, though banks are less exposed than before the financial crisis.

Yardeni says credit markets are where speculative excesses usually show up, and he sees them in AI financing. He argues banks are less involved in those excesses than before the financial crisis, so the systemic risk is smaller. He adds that Washington is tied to the AI industry and would likely step in to support any blow-up.

“the credit markets is sort of the area where you get your speculative excesses. And certainly in the AI field, there's a speculative excesses going on with all the financing that's happening there.”at 14:35