RBC Capital analysts are expressing caution in light of the weak CPI print from last week. They believe that this could have negative implications for stocks moving forward. The upcoming 2Q24 reporting season is seen as a critical test for the market, especially in relation to the rotation trade that appeared to gain traction in the previous week.
Despite the optimism surrounding potential Federal Reserve cuts, RBC remains wary of a potential pullback in the S&P 500. The sentiment and positioning work conducted by the bank suggests that the timing for this pullback is uncertain due to the weak CPI print and the increased optimism for Fed cuts. There are concerns that the negative June CPI print could signify late-quarter weakness in revenues and pricing power, which historically have shown a positive correlation with S&P 500 performance.
RBC points out that the rotation trade from Growth, Large, and Mega Cap stocks to Value, Small Cap, and other segments has faced challenges with multiple false starts. While valuations and positioning may suggest a shift, the analysts stress that fundamentals need to align for this rotation to be successful. Despite the potential confidence in Fed cuts benefiting Small Caps, RBC remains cautious due to GDP trends and worries about consumer resilience.
The bank believes that earnings dynamics could play a significant role in fueling the rotation trade. They have observed some emerging support for Small Caps, with consensus forecasts indicating a strong recovery for the Russell 2000 in late 2024. However, the analysts also acknowledge that the Russell 2000 is currently out of favor, with extreme positioning below SVB lows.
RBC analysts suggest that while the market’s reaction to the CPI print and optimism for Fed cuts may temporarily boost certain trades, the overall implications for stocks are complex. The upcoming 2Q24 reporting season will be crucial in determining the sustainability of these market movements and rotations.