The recent report from RBC Capital analysts raises concerns about the potential impact of the weak CPI print on the stock market. The analysts caution that the upcoming 2Q24 reporting season will be a crucial test for the market. They specifically mention that the rotation trade, which showed signs of gaining momentum last week, will face scrutiny during this period.
Despite the optimism surrounding potential Federal Reserve cuts, RBC remains cautious about a potential pullback in the S&P 500. The timing for such a pullback is seen as complicated due to the weak CPI print and the surge in optimism for Fed cuts. The negative June CPI print is seen as a significant concern, indicating potential late-quarter weakness in both revenues and pricing power. Historically, there has been a positive correlation between S&P 500 revenues and CPI.
RBC points out that while valuations and positioning suggest a shift from Growth, Large, and Mega Cap stocks to Value, Small Cap, and other segments, the rotation trade has faced challenges with several false starts. The analysts emphasize that fundamentals need to cooperate for this rotation to be successful. Despite greater confidence in upcoming Fed cuts potentially supporting Small Caps, concerns about GDP trends and consumer resilience remain.
The analysts suggest that earnings dynamics could fuel the rotation trade, with consensus revenue and net income growth forecasts for the Russell 2000 pointing towards a strong recovery in late 2024. However, the Russell 2000 remains out of favor, with extreme positioning below SVB lows. The overall implications for stocks are considered to be complex, with the reaction to the CPI print and Fed cut optimism potentially boosting certain trades temporarily. The upcoming 2Q24 reporting season will play a crucial role in determining the sustainability of these market movements.
The analysis from RBC Capital presents a cautious outlook on the stock market, highlighting concerns about a potential pullback in the S&P 500 and the challenges facing the rotation trade. The upcoming reporting season will provide valuable insights into the market’s direction and the sustainability of recent market movements.