Lori Calvasina on Recession Pricing, S&P 500 Outlook, and Market Sentiment

Market Conditions and Fear

• 📉 The market is experiencing significant downturns, with the S&P 500 technically in a bear market and the VIX at elevated levels (over 50).
• ⚠️ Some clients are considering a "fourth tier of fear" scenario, suggesting a potential for major crisis and a 50% market value loss.
• 🧠 The current environment is characterized by cascading fear, with a rapid shift towards pricing in a recession.

Small Caps vs. Large Caps and Credit Markets

• 💡 Previously, small caps were outperforming large caps, showing resilience on down days, but this trend has reversed post-Rose Garden ceremony.
• 📊 The failure of small caps to bottom indicates that recession risks are being rapidly priced into the market.
• 🏦 While credit markets have held up, their deterioration could be a necessary part of the market's bottoming process.

Earnings Outlook and Revisions

• 📊 RBC Capital Markets models a stagflationary scenario for 2025 with earnings below bottom-up consensus.
• 📉 In past crises, earnings have declined significantly year-over-year, but some years see flat earnings, suggesting companies can muddle through.
• ⚠️ The current modeled downside scenario for earnings is around 246, with potential for further decline if a full recession occurs.
• ⚠️ A significant portion of earnings revisions (40%) are still to the upside, indicating a lack of widespread earnings cuts.

Market Sentiment and Valuation

• 📈 Sentiment models, looking at net bulls, are showing levels comparable to historical lows during recessions and crises.
• 💡 This extreme negative sentiment is a reminder that markets tend to rebound strongly once resolution is achieved.
• 🎯 Small-cap valuations, specifically the Russell 2000, were at 13.5 times forward P/E, historically bottoming in the 11-13 times range even with elevated earnings.
• 🔑 Investors may need to see earnings numbers come down before having the confidence to buy into the market.