Welcome to RBC’s Markets in Motion podcast, recorded December 8th, 2024. I’m Lori Calvasina, Head of US Equity Strategy at RBC Capital Markets. Please listen to the end of this podcast for important disclaimers.

Three big things you need to know: First, positioning in US equity futures per the weekly CFTC data has taken a tiny hit. Second, consensus US GDP forecasts have moved up, along with consensus Fed Funds and 10 year yield forecasts. Third, other things that jump out on our high frequency indicators include the continued decline in bottom-up consensus 2025 S&P 500 operating margin forecasts, geographical equity fund flow dynamics, and recent sharp inflows into momentum equity funds.

If you’d like to hear more, here’s another 5 minutes.

Starting with Takeaway #1: Positioning in US Equity Futures Has Taken A Tiny Hit

Last week, we spent several days meeting with investors in US equities that are based in Canada, giving us useful perspective into how international investors (who also know the US market well) see the state of US equities today. We asked them about their own views, and found that most had difficulty assigning a “bullish” or ‘bearish” label to themselves. Most believe the US equity rally will continue a bit longer, but have a significant pullback in their sights, though the duration of the current rally and the timing and depth of the potential decline were not uniform.

This context made last week’s CFTC futures positioning data all the more interesting to us. Friday’s update revealed that buyside US equity futures positioning has moved slightly lower after hitting a new all time high. This was also the case for the major equity contracts we’re tracking – S&P 500, Nasdaq 100, and Russell 2000. Prior to Friday’s update, these charts were already of great interest to the investors we spoke with last week. The thing that’s been jumping out to us, and resonating with the investors we’ve been speaking to, is that S&P 500 futures positioning has recently been making a new all-time high and is well above past peaks, which also happened in late 2017 and early 2018 with a peak in January. That January 2018 peak occurred after a sharp move up in the S&P 500 in 2017 (more than 19% on an annual basis) due in large part to excitement over the tax cut bill that passed in December of 2017. The similarity in the data begs the question of whether US equities have already pre-traded some of the political tailwinds expected by many investors to be seen in 2025.

Moving on to Takeaway #2: Consensus US GDP Forecasts Have Moved Up, But So Have Consensus Interest Rate Expectations

What we’re seeing on the CFTC data is a concerning data point for the US equity market and helps to make the case for a temporary pullback before too long. It can also be viewed as a data point supporting the bear case in the S&P 500 that we outlined in our recent outlook report. But it’s important to note that there was also an important, constructive data point for the US market that came out last week. Specifically, the consensus real GDP forecasts for 2025 continued to move up, and now stands at 2.1%. The move higher in consensus GDP forecasts has been driven by upgrades to consensus 1Q25 real GDP views, which speaks to the idea that political tailwinds from the unlocking of business activity are expected to show up in data to start the year.

That bit of good news for stocks was somewhat offset by the increase in consensus forecasts for Fed Funds and 10 year yields that has also been seen. Note that in our price target modeling, the increase in the consensus GDP forecasts is a supportive data point for stock market returns. Our work indicates that stock market returns tend to be weak in the 1.1-2% range, but strong in the 2.1-3% range. However, higher Fed Funds and 10 year yield forecasts are negative data points for the stock market, as our work indicates that higher numbers on these two metrics tend to pressure trailing P/E multiples for the S&P 500.

Wrapping up with Takeaway #3: Some of the other things that jump out on our high frequency indicators as 2024 winds down.

• The first of these that we’ll highlight is on earnings. Although the bottom-up consensus for 2025 S&P 500 EPS has been holding steady at $275, implying a growth rate of just under 13%, it’s worth noting that consensus forecasts for 2025 operating margins have continued to fall. Disappointing guidance in year-ahead outlooks has been coming up in our recent conversations with investors as one possible catalyst for a broader market pullback early in the new year, and it is interesting to us that stock prices seem to be ignoring the more pessimistic outlook for margins so far.

• Next up is another sentiment gauge. Concerns about tail risk, as measured by the TDEX indicator, continue to track below recent highs but are also still elevated vs. history. We think this is a fair representative about how the balance of risk has shifted for stocks in 2025.

• Next up is the results of the Duke CFO survey which came out last week. Confidence in their own companies and the broader economy both rose. Confidence in the former continues to outpace confidence in the latter, though the gap is closing.

• Post election, regulatory policy is seen as the most important policy topic among CFOs.

• Shifting a bit to funds flows…. inflows to US equity funds have remained robust per EPFR’s latest update while outflows from European equity funds (including Western Europe, the UK, France, and Germany) have continued to deepen. Meanwhile, inflows to Canada remain strong.

• And last but not least…. we’ve recently started tracking flows to developed market equity factor funds, and have been struck by the sudden strength in flows to momentum equity funds.

That’s all for now. Thanks for listening. And we sure to reach out to your RBC representative with any questions.