London Fog

The big things you need to know:

• First, the investors we met with this past week, in our trip to London and Switzerland, were keen to explore other opportunities in US equities beyond Semis/Tech/AI, but had difficulty envisioning what those were.
• Second, we highlight continued outperformance of high price momentum in our factor work and what we’re seeing in our valuation work for this part of the market, a pick up in the rate of upward EPS estimate revisions for the S&P 500 as reporting season slows down, and the signal we’re currently getting from S&P 500 and Russell 2000 forward P/Es – things are moving up but aren’t universally back to their 2025 and early 2026 highs.

Welcome to RBC’s Markets in Motion podcast, recorded May 18th, 2026. I’m Lori Calvasina, head of US equity strategy at RBC Capital Markets. Please listen to the end of this podcast for important disclaimers.

The big things you need to know:

• First, the investors we met with this past week in our trip to London, and Switzerland, were keen to explore other opportunities in US equities beyond Semis/Tech/AI, but had difficulty envisioning what those were.

• Second, we highlight continued outperformance of high price momentum in our factor work and what we’re seeing in our valuation work for this part of the market, a pick up in the rate of upward EPS estimate revisions for the S&P 500 as reporting season slows down, and the signal we’re currently getting from S&P 500 and Russell 2000 forward P/E’s – things are moving up but aren’t universally back to their 2025 and early 2026 highs.

If you’d like to hear more, here’s another five minutes. Before we jump into the details, we need a favor. The 2026 Extel (formerly known as Institutional Investor) All America Research survey will open on May 26th and run through June 12th. If you’ve found our research & podcast helpful, we’d appreciate your support. Every vote matters in this category, which is traditionally very tight in the rankings. Please take a moment to vote for Lori Calvasina by name in the Portfolio Strategy category, and let us know if you need helping finding the website to vote at.

Back to regular programming:

Takeaway #1: What investors wanted to talk about on our trip to London and Switzerland last week.

• Some of the topics they were most interested in discussing were AI, earnings, and sector views - there was, overall, more interest in positioning than broader market direction.

• Midterms came up in several meetings as well, with curiosity about our thoughts on whether additional stimulus ahead of the event was likely (we said it was unlikely), and interest and surprise when we noted that betting markets have been starting to turn more optimistic about the possibility of a Republican sweep.

• The health of the US consumer and our thoughts on Small Caps were other recurring questions.

• Iran came up less than we expected, where we sensed wariness as opposed to panic.

• Fed discussion was light, and there wasn’t a lot of focus on the inflation prints, but we also proactively walked investors through the potential impact of higher inflation and interest rate assumptions on our S&P 500 outlook via assumptions in our valuation/EPS model, which we discussed in our most recent target price update.

• The conversations we had on AI, earnings, and sectors were subsets of a bigger discussion.

• Most investors we met with were very much on board with the idea that Tech broadly and AI specifically were extremely bright spots in the earnings backdrop. Our charts on Tech, Energy, and Materials boosting consensus EPS growth forecasts for 2026 and…

• …AI names showing expanding EPS growth leadership in 2026 vs. Mag 7 and SPX broadly were well received.

• Despite this, and some noting that they’d had plenty of exposure to this trade and were performing well, there was a clear interest in exploring what other areas might offer better opportunities going forward.

• There seemed to be agreement with our view that alternatives are tough to identify.

• On commodities – there was more interest in talking about Energy than I’ve seen in a long time in Europe. We pointed out that valuations still looked slightly attractive in the S&P 500 sector.

• On Financials – while we wouldn’t say everyone was bullish, there was clear interest in discussing this sector, and our chart showing how Capital Markets valuations got extremely high last year but have come down was well received.

• And Consumer Staples came up in defensive discussions. Investors shared our frustration with Health Care where we’ve seen weaker EPS revisions and flows, and we noted Utilities might get caught up in affordability concerns around the midterms. One idea that came up in conversation that seemed to really resonate was that of Staples’ problems being well known and that is was already cheap – unlike Consumer Discretionary where problems are known but the sector looks pricey, or Industrials where companies have been emphasizing the ability to manage through and the sector looks expensive.

Moving on to Takeaway #2: What else jumps out.

• On the momentum trade, we’re keeping a close eye on our work that looks at the performance of high price momentum relative to low price momentum within the S&P 500. On our work, high price momentum has continued to rise and outperform low price momentum stocks.

• In a new chart, we’ve started looking at the NTM P/E of both high and low price momentum stocks. We’ve seen P/E expansion in high price momentum and contraction in low price momentum. Relative to low price momentum, high price momentum valuations are a little above average but not highly stretched.

• On earning revisions, we’re now seeing a meaningful uptick in earnings sentiment, the rate of upward EPS estimate revisions, for the S&P 500, its biggest market cap names, AI focused names, the rest of the index, and the Russell 2000.

• Geographically, strengthening upward EPS estimate revisions in the US stands in contrast to continued deterioration for Canada, Australia, UK, and Japan and could help extend the US leadership trade.

• And last but not least, we’re keeping an eye on the stock market’s temperature. Forward P/E’s are approaching past highs for the S&P 500 and Russell 2000 on an NTM basis but not an FY2 basis. This explains both the increased angst we’ve noticed among some investors of late, along with the stock market’s continued climb higher. We could say the same thing about investors’ desire to find opportunities beyond the Semis/Tech/AI trade for opportunity and difficulties in doing so.

That’s all for now. Thanks for listening. And be sure to reach out to your RBC representative with any questions.