RBC's Lori Calvasina on How to Invest in The Post-Pandemic Era | #537

Episode Summary

Executive Summary: RBC strategist Lori Calvasina argues the U.S. market is still in the early post-COVID investing regime, where inflation and Fed expectations—not post-GFC assumptions—drive valuations, sentiment, and leadership. She sees the S&P 500 as fairly valued near 5,300, favors a cautious-neutral stance, and highlights small caps, earnings resilience, and market breadth as the next key battlegrounds.

Main Topics: Post-COVID regime shift (Priority: 5/5): Calvasina says investors are still too anchored to post-GFC playbooks and need to recognize that macro relationships changed after COVID, much like they did after the financial crisis and the tech bubble. Sentiment and Fed whiplash (Priority: 5/5): She emphasizes AAII and other sentiment gauges to show how quickly investor mood has swung with shifting Fed-cut expectations and inflation data, creating repeated pullbacks and rallies. Valuation framework and S&P 500 target (Priority: 5/5): Her valuation work uses trailing PEs, inflation, and interest rates to estimate fair value. She says the market is fairly valued and sets a year-end S&P 500 target of 5,300. Election and policy uncertainty (Priority: 3/5): She sees limited near-term trading opportunities from the U.S. election because market effects are usually modest and analysts are not finding extreme outcomes across sectors. Small caps, growth, and value rotation (Priority: 4/5): Small caps remain cheap and underowned, but they need Fed easing and/or stronger GDP to break out. She also discusses evolving definitions of growth and value as industrials become more growth-like. Market concentration and Mag 7 (Priority: 4/5): The top names still trade at premium multiples, but earnings growth is slowing while the rest of the market is improving, making a catch-up trade plausible later. Margins, earnings, and corporate adaptability (Priority: 4/5): She argues corporate margins remain surprisingly resilient because companies have become highly adept at managing crises through cost control, automation, and operational flexibility.

Key Arguments: The post-GFC investing framework no longer fully explains market behavior; inflation is now a more important driver of P/E multiples than interest rates in the current regime. Investor sentiment is a useful market timing tool right now: AAII net bulls near one standard deviation above average have repeatedly preceded market pullbacks. The market is not a bubble in the classic sense; the premium multiples of large-cap leaders are largely justified by superior earnings growth. The S&P 500 is fairly valued around 5,300 based on current consensus inflation and Fed assumptions, so a materially higher move needs new information such as lower inflation or more Fed cuts. Election outcomes usually matter less than investors think for broad equity returns, and current sector-level survey responses are mostly neutral to mildly bullish rather than extreme. Small caps are inexpensive and better positioned than in prior cycles, but they typically perform after Fed easing begins, not merely in anticipation of it. Corporate margins have stayed stronger than traditional models predict because companies have learned to absorb shocks and improve efficiency faster than expected.

Data Points: S&P 500 year-end target: 5,300 - Calvasina’s stated target for December 31, 2024 AAII net bullishness threshold: ~22% - Approximate one-standard-deviation-above-long-term-average level she says has marked recent sentiment extremes Recent S&P 500 pullbacks referenced: 10% retracement and 5.5% drop - Examples tied to sentiment highs and Fed/inflation worries Valuation model stress range: 21.8x to 19.1x trailing P/E - Her regression model using PCE, Fed funds, and inflation under different assumptions S&P 500 earnings estimate: 237 - Her model’s 2024 EPS estimate Bottom-up consensus EPS: 245 - Street consensus for 2024 earnings Small-cap forward P/E: 15.2x - She says small caps have returned roughly to average valuation Russell 2000 forward P/E low during 2022: 11.3x - She cites this as consistent with recessionary pricing Top 10 S&P 500 multiple: High 20s (roughly 25-27x) - Valuation for the most concentrated large-cap leaders Rest of S&P 500 forward P/E: ~16x - Valuation for the non-top-10 portion of the index Mag 7 earnings growth last year: ~35% - Used to explain premium valuations Mag 7 earnings growth next year: ~14-15% - Expected deceleration in growth GDP forecast for 2024: 2.4% - Used to support the argument that U.S. growth is decent and helpful for cyclicals/small caps Average GDP growth benchmark: ~2.5%-2.6% - Historical average referenced for comparison 2022 drawdown in the S&P 500: 25% - She links it to recession-like sentiment and inflation shock Typical recession drawdown: 27% - Benchmark used to contextualize 2022 market behavior U.S. PCE assumption: 2.6% at year-end - Embedded in her valuation model Alternative inflation stress assumption: 3.5% PCE - Used in the lower-valuation stress case Commercial real estate / financial system context: Stress tests worked - Qualitative conclusion rather than a numeric metric

Pivotal Quotes: "We’re still in the early days of the post-COVID era of investing." — Lori Calvasina: Her central thesis on why old valuation and sector relationships may no longer apply "We really are driven by the math." — Lori Calvasina: Explaining her valuation process and preference for data over narrative "The multiple chase the earnings growth." — Lori Calvasina: Her explanation for why the market’s concentration in mega-cap leaders has been rational

Implications: Listeners should expect a regime defined by inflation, Fed policy, and earnings dispersion rather than easy mean reversion. Calvasina’s view implies neutral broad-market positioning, careful attention to sentiment, and patience for small caps and broader participation.