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4 Ways to Bet on a ‘Fast and Furious’ Stock Rally: RBC Capital Markets


  • Stocks may be bottoming out if a recession doesn’t come, said Lori Calvasina of RBC Capital Markets.
  • Prepare for slower growth — but not a downturn — as consumer spending falls and inflation rises.
  • Here are four ways to bet on a stock market rally, including one group that’s shockingly cheap.

Bulls have been on the retreat in the first half of 2022 as stocks struggle to shake off concerns about slowing economic growth, stubbornly high inflation, and tightening financial conditions.

Market strategists like Lori Calvasina, the head of US equity strategy at RBC Capital Markets, have had to rethink their S&P 500 price targets this year, as the widely watched index has fallen nearly 20% to 3,900 year-to-date.

After trimming her year-end S&P 500 price objective from 5,050 in December to 4,860 in April and then again to 4,700 on June 6 as market conditions continued to shift, Calvasina is confident that this third target will be the charm — and that the worst of the stock market selloff is over.

“We don’t think the rest of the year is going to be easy, but we do think if we can avoid


recession

, we’ve probably put in the lows,” Calvasina said in a recent interview with Insider.

There’s no guarantee that the US can avoid an economic downturn, Calvasina said, but she thinks there’s about a 60% chance that there’s no recession. Calvasina said she’s bracing for “materially slower growth” anyway, especially as companies start to resort to layoffs and hiring freezes

The good news is that Calvasina believes that many of the issues the economy faces are already priced into stocks. That pessimism may soon be a contrarian buy signal.

“Sentiment does look pretty washed out,” Calvasina said. “And after you hit that wash-out level on sentiment, you do tend to see pretty fast and furious rebounds in the market.”

Although predicting where stocks are heading next is an inexact science, it’s also far more than guesswork. Calvasina said that she based her S&P 500 price target on 11 different models that each use information like economic growth, investor sentiment, and stock valuations to generate a fair value estimate for the index. Those models imply that the S&P 500 has 10% to 25% upside from where it stands today.

Interestingly, stocks have typically risen 4% to 6% in the year prior to a weaker-growth environment, Calvasina said, though she added that selloffs of 14% to 20% during growth downturns have also materialized. But the strategy head also said that US stocks tended to return to their pre-crisis peaks in four or five months and rise 25% within seven months of bottoming.

If history repeats itself, then the S&P 500 may be nearing its low now after falling 18% since late December, and should theoretically return to its late 2021 peak by the middle of October or November. And a 25% increase for the 500-component index would bring it to 4,875 by the middle of next January.

4 ways to make a contrarian bet on a market rally

Though there are several reasons to be cautious about stocks, including the Consumer Price Index (CPI) accelerating to a 41-year high of 8.6% in May, Calvasina is betting that there’s plenty of pessimism already priced in. That’s why, in her view, it’s time for investors to unload


defensive stocks

in sectors like consumer staples that are getting pricey on a valuation basis.

Four types of stocks should benefit as the economy continues to grow, albeit at a slower pace, Calvasina said: growth stocks, especially those in the technology sector, as well as more economically sensitive financials and small caps.

Growth stocks have largely fallen out of favor in 2022 as interest rates rise, but are worth considering because they tend to outperform when economic growth slows, Calvasina said.

“You typically see this fierce outperformance of value that happens heading into the first rate hike,” Calvasina said. “Normally, we do see growth leadership take back over, and we think that’s because usually when the Fed lifts off, it cools the economy.”

The decline in growth stocks this year has made them more attractive on a relative growth basis, Calvasina said, adding that the trend is especially true for tech stocks.

“If you look at the tech part of the market, the valuation froth is out,” Calvasina said. “If you look at the most popular hedge fund stocks, you’re back to 2017, 2018-type P/E multiples and relative performance trends. So not a ‘hold-your-nose-and-buy’ situation at all.”

Though value-oriented stocks may be losing their valuation advantage over their growth peers, Calvasina said that she’s optimistic about beaten-down financials. No group of stocks was as hyped by Wall Street coming into 2022 as financials were, but the sector has been a bitter disappointment as the economy has slowed. Calvasina said the concerns are overblown.

“Financials has just a deeper valuation case,” Calvasina said. “I think it was really punished on recession fears earlier in the year. And as those fade and people get more comfortable with the idea of slowing growth, I think they should do better.”

Calvasina continued: “Our banks analyst thinks that if we get a couple 50 basis point hikes from the Fed and then they start to slow down to 25 or even take a pause, he describes that as ‘nirvana’ for the banks.”

Finally, economically sensitive small caps are historically cheap, in Calvasina’s view, and should mount a rebound if the team at RBC Capital Markets is correct that a recession isn’t imminent.

“If you look at relative valuations, small is the cheapest we’ve seen versus large since the tech bubble,” Calvasina said. “If you look at absolute valuations on the Russell 2000, you’ve got a clear-cut valuation case. The P/E multiple in the Russell 2000 is below pandemic lows — not necessarily right at the low end of its historical range, but really deeply in attractive territory, much more so than what we see in the big-cap space.”

Investors can consider adding exposure to Calvasina’s favorite groups of stocks through the following exchange-traded funds (ETFs) that Insider selected: the Vanguard Growth ETF (VUG), the Technology Select Sector SPDR Fund (XLK), the Vanguard Financials ETF (VFH), and the iShares Core S&P Small-Cap ETF (IJR).



Read More: 4 Ways to Bet on a ‘Fast and Furious’ Stock Rally: RBC Capital Markets

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