Analyst: We’ve got very robust GDP expectations

RBC Capital Markets Head of U.S. Equity Strategy, Lori Calvasina, joins Yahoo Finance to discuss the tech space within the market and how inflation might play a role, and the impact of the new possible corporate tax rate.

Video Transcript

JULIE HYMAN: We know there's been a lot of turbulence recently in tech stocks. And our next guest says, well, that may not be done. Let's bring in Lori Calvasina, RBC Capital Markets Head of US Equity Strategy. Lori, it's good to see you.

And indeed, almost a week ago you said in a note that you didn't think the pain was over for tech stocks. A lot has changed, I guess-- maybe or maybe not-- in the past week. We've had a lot of market action. But where do you stand on that question, and what do you think is to come in large cap tech?

LORI CALVASINA: Well, thanks for having me this morning. And look, we don't think there's any problem with the fundamentals in the tech space. I just want to be clear on that. But we think it's been an overowned, overvalued part of the market and is just the wrong macro backdrop for this part of the market at this moment in time.

And we basically last week just went back to some analysis we did in March, where we looked at positioning. We looked at valuation. And we looked at some of those fundamental drivers in terms of the macro and we said, what's changed versus March? And we found that valuations had gotten a little bit better, but the sector still does not look cheap relative to the broad market.

We looked at positioning. And we found that we had really started to see the positioning come down, if you look at the futures market. But we weren't back down to the lows that we saw in 2009, 2018 when you really did see some major inflections in the tech space.

And so bottom line, we still think inflationary pressures are here. And tech is one of the biggest sources of funding for rotation back into reflationary place-- things like financials, energy, materials. And we don't think those inflation pressures are going to abate anytime soon. So we think it's just not the right time yet to jump back into this space.

BRIAN SOZZI: Lori, what sectors of the market are too cheap to ignore right now?

LORI CALVASINA: So I would say financials is actually still very cheap. I was talking to our bank strategist this morning, Gerard Cassidy, and he was saying that as he talks to investors, that a lot of people have gone on board with the banks trade. But they're wondering if the valuations have gotten ahead of the space. And our work actually shows that the valuations are still deeply compelling.

We also did a deep dive into 13Fs for hedge funds based on the data that just came out last week. And we were surprised to find that the hedge funds really weren't adding a lot of bank exposure in the first quarter, and their underweights are still fairly deep. So I think that's an area that we're all kind of lazily bullish on the sector at this point in time. But if you look at the valuation and positioning, there's still a lot of catchup in that space that needs to happen.

MYLES UDLAND: You know, Lori, I want to ask you just broadly about earnings expectations right now and the market multiple overall. You know, a number of your peers on the Street have started to talk about this idea of the multiple actually coming in, for the S&P broadly we're saying here, but that the market could continue to go up, the price of the S&P can go up, because earnings are just set to be so darn strong next year.

Where are you guys at right now with your expectations for S&P EPS in '21 and '22, and have you thought about, you know, raising those estimates? I mean, I think I've seen at least one firm maybe $35 per share higher than you guys are in 2022 at my last check.

LORI CALVASINA: Sure. So we did actually raise our numbers recently. And we're at 200 for next year. But you have to realize that one of the things we're baking in for next year that pulls our numbers down is that we're baking in a 4% increase in the corporate tax rate.

So we think it's reasonable at this point in time to assume that Biden is going to get something done on infrastructure. It may not be everything he wants. But we keep hearing the number 25% come up a lot, which would be a 4% increase. So we've actually gone ahead and baked that into our numbers. I think that some of my competitors have. Some of them haven't. But what we do know is that the bottom-up stock pickers have not baked those into their numbers yet. So I think that's a pretty big overhang.

And I'll tell you, you know, as we look at our assumptions-- and I'm not ruling out further upgrades from here. But we are already being pretty aggressive in terms of our assumptions for margin expansion and buyback recovery. I think we actually have buybacks coming in at a higher than pre-pandemic pace this year, with further gains next year.

So you know, with all the inflationary pressures out there, and my margin assumption is already pretty aggressive in this corporate tax hike looming over us, it's going to be-- I really need to find some additional sources of upside to get those numbers higher. And right now it's tough.

JULIE HYMAN: And Lori, what about a potential source of downside? I mean, you mentioned inflation a couple of times. And I wonder when the inflation talk starts to turn a little bit more dramatically toward demand destruction, potential demand destruction, right? we're going to explore that in more detail with Jan Hatzius the Chief Economist at Goldman Sachs, in the next hour. But I'm curious if that is informing your view on where equities are going as well.

LORI CALVASINA: So it's not informed our view yet. And we've got very robust GDP expectations assumed. And when we think about the style trade growth to value, and when we also think about the size trade-- largecap back to small cap-- the thing we've been trying to focus people on is that 4% GDP is anticipated by the economists on the street next year.

So that's a really healthy number. Any time you're above trend, you tend to see small caps and value outperform. So we've been discussing that a lot with investors.

I will tell you though, Julie, it felt like two weeks ago in my marketing with investors that there was a little bit of a turn in terms of the buy side. And it does feel to me like investors are starting to worry about that potential demand destruction. So I'm not baking it into my numbers. We are not seeing the economists on the Street bake it into their numbers yet. But I am starting to hear hints of worry about that in the investors I speak with.

BRIAN SOZZI: Lori, you mentioned corporate taxes just a moment ago. Do you think that is going to be a stock market headwind at some point this year?

LORI CALVASINA: I think it is a limiting factor. But I don't expect any kind of major selloff specifically because we get some legislation on corporate taxes. And that's in the context of, I am expecting something to cause a pullback later this year. I just don't think corporate taxes are it.

And look, we think 25% is the realistic number. We think that companies, a lot of them are on record from a few years ago when Trump was cutting corporate taxes as saying 25% would be just fine. So I think it's going to be hard for companies to come back and now argue against it.

And I also will just tell you, frankly, since January I have easily been spending half of some of my meetings-- you know, an hour-long meeting, 30 minutes-- talking about corporate taxes with investors. This is so being debated on the Street right now. Those risks are clearly starting to get baked in. So I have a hard time-- this is not the thing that comes from out of nowhere and takes the market down.

JULIE HYMAN: We've been debating it on this show, in fact, quite frequently, Brian Sozzi and I, Lori. Lori Calvasina, RBC Capital Markets Head of US Equity Strategy. Good to see you. We'll catch up with you again soon.