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RBC's Calvasina Sees S&P 500 at 5,150 By Year-End

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Bloomberg Apr 4 23:29 · 45.2k Views

Lori Calvasina, RBC Capital Markets head of US equity strategy, reacts to the selloff in US stocks on "Bloomberg The Close."

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  • 00:00 As we assess the damage done here on this week, Lori, and try to look ahead to maybe what next week might bring, I am curious as to what you read
  • 00:09 into the sentiment
  • 00:10 behind the drop in prices that we saw over the last couple of days in equity markets.
  • 00:16 Well, it's
  • 00:17 first of all, thanks for having me, Romain.
  • 00:19 And look, I think it depends on whether you're talking about yesterday, whether you're talking about today.
  • 00:24 You know, one of the points of conversation that was coming across, you know, kind of kind of my desk and my e-mail today with some of my colleagues internally was about how,
  • 00:31 you know, things like the VIX, you know, kind of really moved off things like the T decks, things like the C decks or, or S decks rather.
  • 00:37 So it it looks like, you know, it's sort of that corner of the options market.
  • 00:39 We are finally getting a bit more fear.
  • 00:41 I wouldn't quite call it panic,
  • 00:43 but it felt like, you know, something bordering that versus what we, I had yesterday was pretty orderly.
  • 00:47 We weren't seeing as much stress and things like the T Dex and the S Dex.
  • 00:51 If I kind of rewind and look back at the beginning of the week, you know, I think this market wanted to bottom around 10% from the February peak.
  • 00:59 And as I think back over the last few weeks,
  • 01:01 a lot of investors I spoke with, especially people in sort of the hedge fund community,
  • 01:05 you know, thought there was still a Trump put.
  • 01:06 You know, I, I, I kind of debated that with them a bit, but, you know, really wanted to buy the dip and wasn't quite sure where that put would be, where that low would be.
  • 01:14 But you could see the market defending that mid March low throughout the week.
  • 01:18 And the Rose Garden announcement just did not permit that.
  • 01:22 So I think you've had some people, you know, sort of,
  • 01:25 you know, kind of making sense of that frankly, and kind of stripping away that idea of a Fed put.
  • 01:29 And I think the idea that the administration would be willing to incur short term damage to the economy, short term damage to the stock market that still just wasn't really sinking in at the beginning of the week.
  • 01:39 And I think it is now.
  • 01:40 We're talking about an S&P now down 17% from that all time high.
  • 01:43 Laurie, we should also point out this is a global sell off
  • 01:46 the MSC ACI All World Country Index down 1415% from its all time high
  • 01:50 as well.
  • 01:51 And it raises the question as to whether there is a switch to be flipped.
  • 01:55 Because I know there are a lot of people that talk about the Trump put and at this point maybe that put is he backs off on the tariffs, maybe there's some negotiation.
  • 02:01 But I do wonder if so much damage has been done, how long would it even take us to claw back
  • 02:07 to where we were
  • 02:08 seven or eight weeks ago?
  • 02:10 That's a great question, Romaine.
  • 02:11 I mean, I think of some of the price action showed you today, if you,
  • 02:14 you know, kind of see hints of progress, right, on certain specific things.
  • 02:18 There are individual stocks and corners of the market
  • 02:21 that can recover from that, right?
  • 02:22 And we all know we've lived through this for many decades, right?
  • 02:25 Like when you have big drops like this on the other side, rebounds can be fast and furious.
  • 02:30 And so we've, you know, sort of seen people, you know, talking about that in recent weeks kind of being unwilling, you know, to get too bearish because of that rebound impact.
  • 02:37 But I did say, you know, when we cut our target and we put that note out this good morning,
  • 02:41 we've been signaling we probably did do that for quite some time if we broke below the mid March low.
  • 02:45 So we had to go ahead and kind of pull the Band-Aid off on that.
  • 02:48 But you know, we we did change one of our assumptions about the political backdrop for stocks.
  • 02:52 And you know, as recently as a couple weeks ago when we cut our target down to 6200 the first time we went to 5550 today.
  • 02:58 But when we cut that, made that first cut, we left in an assumption that we would see the return of a business friendly environment to the stock market later this year.
  • 03:05 I'm sort of baking in the typical game that you get when Republicans control the White House and both chambers of Congress.
  • 03:10 We took that out this morning and we basically replaced that with an assumption that we needed to look back to 2018 when we had a down 6% year.
  • 03:18 We had a 20% draw down.
  • 03:20 That was, of course,
  • 03:21 the the year of the first China trade war.
  • 03:23 And we had frothy sentiment positioning to start the year.
  • 03:25 You had concerns about Fed policy error.
  • 03:28 Not exactly the same this time around.
  • 03:29 I don't think a ton of people are worried about the Fed,
  • 03:31 but we do think that there's a lot of, you know, symmetry of between that year and this year.
  • 03:36 Interesting that you're using 2018 as an analogue here.
  • 03:39 You had mentioned earlier that the Trump administration has warned and is OK with
  • 03:44 the pain and during the pain in the short term in order to incur those long term benefits of bringing manufacturing back to the US.
  • 03:50 His team had predicted a recovery in the second-half even before the April 2nd announcements.
  • 03:55 Is that still on the table Lori for you?
  • 03:58 Well, look, so we've got 5550 as our year end target.
  • 04:01 That's how we think of our target as a as a kind of year end bogey, you know, not sort of an entry year type number.
  • 04:07 And so you know that does put us up a bit from here.
  • 04:09 You know, we do think in the interim we could go lower.
  • 04:11 So a typical growth scare and that's what we seem to be in in the middle of right now.
  • 04:15 Maybe it'll end up being a recession pricing, we'll see.
  • 04:17 But that should bottom out, you know kind of in the 4900 to 5300 range.
  • 04:21 We're obviously well below that 5300 now.
  • 04:24 But if you if you look at kind of the idea of a rebound, that's certainly supported by our sentiment work, AAII net bulls are as bad as the lows of 2022, They are as bad as the lows of the 1991 recession and they are as bad as the depths of the financial crisis.
  • 04:38 That is stunning.
  • 04:39 We've been seeing that on that data for quite some time.
  • 04:41 That's the only one of our models.
  • 04:43 You know, they're still giving us a really strong bullish signal at this point in time.
  • 04:46 OK, So your base case does not seem to include a recession.
  • 04:50 What is your worst case
  • 04:52 scenario in terms of the target for the S&P 500?
  • 04:55 So you know, I think at this point, Scarlett, I think you want to look at recession pricing and.
  • 05:00 If we were to see sort of a typical recession drawdown, you would go back to the February peak and you would look at a median or average drop about 27 or 32%.
  • 05:07 And if I, if I'm remembering my math correctly, that takes us to about 4200 to 4500 on the S&P.
  • 05:13 We've heard other forecasters talk about similar numbers coming, you know, from different approaches.
  • 05:17 But for me that would probably be the worst case scenario right now.
  • 05:20 You know, the base case for me is still that we have a growth scare, something similar to 20/10/20, 11:20, 15/16/2018.
  • 05:28 Those were all fears of a recession or a major crisis where really we got to the brink and we saw a true panic come back into markets.
  • 05:35 But we didn't price in a full recession because something happened to convince markets that that was not at hand.
  • 05:41 So that's what we're modeling now.
  • 05:42 I would say the other thing we're modeling Scarlet is more of a stagflationary scenario.
  • 05:45 So we baked in,
  • 05:47 you know, inflation in the upper threes, couple of cuts from the Fed
  • 05:50 and we've also baked in like half a percent on GDP in real terms in terms of the full year annual gain.
  • 05:55 So we've stressed the model pretty sharply and we can still kind of get down to, we can still get to that 5550 number, though frankly some of our modeling is a bit more pessimistic than that if we're just looking at the economy or we're just looking at our valuation work.