RBC’s Calvasina Warns of ‘Significant’ Drawdown in U.S. Stocks

(Bloomberg) -- RBC Capital Markets LLC’s Lori Calvasina doesn’t like what she sees in U.S. stocks right now.

The S&P 500 Index rose as much as 31% from its closing low in March, as waves of central-bank stimulus combined with fiscal measures from governments worldwide reassured markets ravaged by the coronavirus pandemic. But Calvasina, RBC’s head of U.S. equity strategy, cautions that there could be another leg down before markets truly regain their footing.

“It’s possible, though far from certain, that the S&P 500 found a bottom on March 23 due to unprecedented Fed stimulus and a looming bottoming of the economy,” Calvasina wrote in a report Thursday. “But valuations are stretched again and investor capitulation never occurred, leaving stocks vulnerable to bad news in the coming months.”

Other concerns Calvasina has include:

• Stocks likely reached a low on expectations of a bottoming in the economy, but investors have been telling RBC recently that they are increasingly concerned about longer-term hits to the economy and consumers.
• Earnings-per-share forecasts for 2021 still appear too high as companies say it may be some time before the economy and business conditions return to normal.
• Valuations seem high; an opportunity likely emerged on March 23 at the bottom, but “evaporated quickly.”
• The U.S. election could be a risk; Joe Biden, the likely Democratic nominee to take on Donald Trump in the November race, is being viewed by “a growing percentage” of investors as “a negative outcome for the market.”
• Capital-expenditure expectations have plunged across most major surveys.

RBC has plenty of company, with the big-name investors like Stan Druckenmiller and David Tepper saying stocks had run up too far. Goldman Sachs Group Inc.’s David Kostin expects a potential near-term drop by the S&P 500 to 2,400 -- 15% below the last close of 2,820. As of mid-April, the median year-end estimate for the benchmark was 2,875 among strategists tracked by Bloomberg.

“The S&P 500 is currently a bit above our year-end 2020 S&P 500 price target of 2,750,” Calvasina said. “But we feel no need to raise it.”

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