RBC Capital analysts express caution following last week's weak CPI print, suggesting it might not bode well for stocks.
The bank notes that the 2Q24 reporting season is anticipated to be a crucial test for the market, particularly the rotation trade that seemed to gain momentum last week.
RBC analysts note, "We see 2Q24 reporting season as a key test for the rotation trade that attempted to start up again last week."
Despite the optimism surrounding potential Federal Reserve cuts, RBC remains concerned about a potential pullback in the S&P 500. The recent sentiment and positioning work indicate that the timing for such a pullback is complicated due to the weak CPI print and the resulting surge in optimism for Fed cuts.
"We remain worried about a pullback in the S&P 500 given the latest developments on our sentiment and positioning work," they comment.
The analysts highlight the possibility that the negative June CPI print might indicate late-quarter weakness in both revenues and pricing power as a significant concern.
The bank adds that historically, S&P 500 revenues and CPI have shown a positive correlation.
"The one big, general worry that we do have about 2Q24 reporting season is the possibility that last week's negative June CPI print may be signaling some late-quarter weakness on both revenues and pricing power," RBC analysts warn.
Regarding the rotation trade, RBC points out that while valuations and positioning suggest a shift from Growth, Large, and Mega Cap stocks to Value, Small Cap, and other segments, this rotation has faced several false starts.
"Fundamentals need to cooperate," they emphasize. While greater confidence in upcoming Fed cuts might support Small Caps, RBC remains cautious due to GDP trends and concerns about consumer resilience.
Additionally, the bank feels earnings dynamics could potentially fuel the rotation trade.
Their analysts found emerging support for Small Caps, noting that "consensus revenue and net income growth forecasts for the Russell 2000 are baking in a strong recovery in late 2024."
However, they also acknowledge that the Russell 2000 remains out of favor, highlighting its extreme positioning below SVB lows.
In conclusion, RBC analysts suggest that while the market's reaction to the CPI print and Fed cut optimism might temporarily boost certain trades, the overall implications for stocks are more complex.
They state the upcoming 2Q24 reporting season will be crucial in determining the sustainability of these market movements.