Welcome to RBC’s Markets in Motion podcast, recorded April 3rd, 2023. I’m Lori Calvasina, Head of US Equity Strategy at RBC Capital Markets. Please listen to the end of this podcast for important disclaimers.

This week in the podcast, we run through the most interesting things that crossed our desk last week which felt like one in which the equity community collectively exhaled. Two big things you need to know:

• First, according to the latest Duke CFO survey, the C suite was were becoming more optimistic before SVB and was looking ahead of 2024 as a recovery year, while expectations for sources of inflation were dimming.

• Second, things that jumped out from our high-frequency indicators last week include the decline in bond market volatility off highs consistent with past bottoms in the stock market and the stabilization of performance for banks and small caps, which suggest to us that sentiment may be starting to heal. Both are good signals for the stock market.

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Takeaway #1: CFOs Were Becoming More Optimistic Before SVB, While Expectations for Sources of Inflation Dimmed

One of our favorite ways to track corporate outlooks is the CFO survey conducted by Duke University along with the Atlanta Fed and Richmond Fed. The latest survey came out last week, with data from a poll that was conducted from February 27 through March 10. This provides us with a look at C Suite outlooks just prior to the onset of the regional banking crisis. Four things jumped out to us as we reviewed the data:

• First, optimism on the broader economy and one’s own company improved slightly in the latest poll. In the case of the broader economic views, optimism had fallen back to 1Q20’s low in the 2Q22 poll, meaning that a recovery off recessionary/pandemic lows has been in place and continued through early March. This echoes what we’ve been seeing in a few other C suite surveys such as the Conference Board’s CEO survey, where a recovery in confidence has also been under way after hitting levels close to those that typically mark the bottom.

• Second, CFOs also remained more optimistic about their own firms than the broader economy, which speaks to the idea that companies feel prepared to weather whatever storm is thrust upon them. This is a theme that’s been consistent on earnings calls in recent years, and management talent helps to explain why earnings have been so resilient in the face of myriad challenges (the China trade war, COVID, the supply chain crisis) in recent years.

• Third, while expectations on 2023 revenue growth dimmed in the latest Duke CFO survey, they picked up for 2024 revenue growth, reinforcing something we’ve seen in recent EPS and GDP forecasts—the idea that 2024 will be a recovery year with damage mostly contained in 2023.

• Fourth, CFOs in the survey have been getting less optimistic about pricing and wage growth for both this year and next.

• This is a supportive data point for the inflation moderation thesis that’s contributed to the recent ratcheting down in expectations for further Fed hikes and the terminal rate.

As we wait for 1Q23 reporting season, we think one of the most important questions for companies will be what’s changed in their outlooks following the SVB collapse both in terms of the fundamental backdrop and regarding the sources of inflation. Based on what we’ve been reading so far, we aren’t so sure much has changed just yet. Early indications have been that direct impacts on the banks in question were limited, those that did have exposure managed through, and the event itself is contributing to greater macro uncertainty going forward. Secondary impacts may take some time to play out, and we expect to see that discussion pick up.

Moving on to takeaway #2: a few other things that jumped out in our high frequency indicators last week are positive signals for the stock market.

• First, Bond market volatility has started to come down. The MOVE index has started to pull back after spiking to levels in mid March that were around or higher than every past crisis except the GFC. Like VIX, a spike in MOVE has typically been seen around major equity market bottoms.

• Second, leadership trades took a moment to pause and reflect after hitting past inflections.

• Banks performance continued to show signs of stabilization last week after returning to 2020 lows relative to Nasdaq 100.

• Small Caps also held their ground vs. Large Caps after returning to the relative lows of May 2022.

Meanwhile, Growth leadership stalled relative to Value after returning to its August 2022 high. Despite the fact that Growth stocks and Tech have supported the S&P 500 in recent weeks, adding to its resilience, we take these as signs of stabilizing sentiment—ultimately a good thing for stocks.

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