Why RBC's Calvasina Says Stock Market Pullback Is Long Overdue

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00:00Laurie Calvacina, RBC Capital Markets Head of U.S. Equity Strategy, writes, quote,

00:04a short-term pullback in the broader U.S. equity market has been long overdue for a number of

00:09reasons, in our opinion, despite our constructive view on the year ahead. And Laurie joins us now.

00:15Laurie, you've also been sort of looking through the wreckage, I mean, if you can even call it a

00:19wreckage of last week, and trying to discern whether the pullback has run its course. What

00:24are you looking to to figure that out? Yeah, look, and I think it's TBD, and I know nobody

00:27likes that answer, but that is intellectual honesty. Look, we're watching valuations which

00:32on an FY2 basis have been kind of bumping up against ceilings since August, right? And we've

00:37seen some improvement there. We haven't seen a ton. I don't know that valuations are going to give you

00:42sort of the magic bullet to tell you to get in or get out. We are going to cycle into a new year of

00:45earnings relatively soon. I'm watching AAII net bulls very closely, and I think what I'm seeing

00:52there really summarizes how I'm thinking about the broad market generally right now. We saw net

00:56bulls fall to about minus 11 percent last week, and the four-week average is a little less than

01:01minus 5 percent. If you look at where that four-week average is, it could absolutely have more room to

01:07fall, right? We haven't even hit one standard deviation below the long-term average yet.

01:11But if you take, you know, sort of the levels we're at, and you look at what they typically signal

01:15about 12-month forward performance in the market, you tend to get about a 10.8 percent forward return.

01:20So, you know, short-term, are we out of the woods yet? Hard to say. But on a longer-term basis,

01:26I do think the good news is sentiment's already been pretty bearish. I mean, what is, you think,

01:31the main driver? Because before Friday morning at 7.30, it looked like the AI concern was the main

01:39driver, you know, or AI optimism. And then John Williams came out and said, like, near-term,

01:44we still need cuts. And now it looks like the Fed is the main driver again. So I think all of these

01:49things have been contributing. And when you have extended valuations, lots of little things, you

01:55know, I hate to use the word cockroaches, right? But I think lots of little problems get magnified.

01:59And I think if we look at the Fed specifically, we've seen for several years that if you look at

02:04how many Fed cuts are priced in over the course of the next year, and you compare that to S&P 500

02:09performance, or if you compare that, frankly, to small versus large, and Russell 2000 tends to be a

02:13rate cut bet a lot of people like to make, both of those, you can see the reaction, you know, just

02:18in the real time, right? When we're putting more cuts in, small caps tend to do well, market tends

02:23to go up. When you take those cuts out, small cap tends to lag, and the broader market tends to stumble

02:28a bit. And so we reverse that. I wouldn't ignore what's going on with Bitcoin. And it's not my area

02:33of expertise. I don't know why.