From Rotation to Derisking

The big things you need to know:

• First, lingering concerns about interest rates and the Fed flared up on Friday after a surprisingly strong NFP report. We run through our thoughts on why this hit the Nasdaq so hard and note that risk of a tier 1 / garden variety pullback (5-10% from peak) has risen in the near term.
• Second, other things that jump out include the recent drop in bitcoin, which supports the idea that risks of a tier 1 pullback have risen, and the sharp drop in Small Caps on Friday on interest rate fears.

Welcome to RBC’s Markets in Motion podcast, recorded June 8, 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, lingering concerns about interest rates and the Fed flared up on Friday after a surprisingly strong NFP report. We run through our thoughts on why this hit the Nasdaq so hard and note that risk of a tier 1 / garden variety pullback (5-10% from peak) has risen in the near term. Second, other things that jump out include the recent drop in bitcoin, which supports the idea that risks of a tier 1 pullback have risen, and the sharp drop in Small Caps on Friday on interest rate fears.

If you’d like to hear more, here’s another five minutes.

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Now, back to regular programming.

Takeaway #1: Interest Rate Fears Pave The Path From Rotation To Derisking

Worries about rising rates and the Fed have ebbed and flowed in recent weeks and loomed large at a macro gathering we attended last week. We went through how we’re thinking about this risk in our May 27th podcast – Everything in Moderation” and if you’d like to go through all that math again we’d encourage you to listen to that podcast once more. In a nutshell, our modeling suggests that on a longer-term, 12-month time frame, US equities can weather a move up in 10-year yields – as long as it doesn’t breach 5% -- and a few hikes from the Fed, admittedly with some near-term indigestion in the form of a 5-10% pullback. Anything more onerous we see as more challenging situation for the stock market on a 12-month time frame and for our 7,900 price target.

Not surprisingly, Friday’s May NFP report was viewed by the equity market through the lens of interest rates rather than fundamentals. Stocks fell sharply after an upside surprise for May and upward revisions to April which RBC’s Economics team wrote “confirms the labor market is strong, despite headwinds.” For now, good news is being treated as bad news if it stokes fears of higher interest rates.

Beyond interest rate concerns, it was also a case of bad timing for the US equity market. As we highlighted last week, while the forward P/E multiples for the S&P 500, Russell 2000, and Nasdaq 100 have generally looked elevated but not back to their most recent highs (mitigating deeper pullback risk), the median NTM P/E of the top-10 names in the S&P 500 has been approaching the high end of its pre/post-COVID range (adding to pullback risk, or at least the idea of leadership rotation).

Additionally, we pointed out that when we take the ratio of the forward P/E of those top-10 market cap names to the rest of the S&P 500, and compare that to the ratio of those two baskets on long-term EPS growth expectations, that a gap has opened up, suggesting the relative P/E may need to come down.

And we also noted that the recent broadening out of upward EPS estimate revisions beyond the top-10 market cap names was supportive of the idea of a short-term leadership shift away from the mega cap Growth trade.

This week, we’ll add a few other data points to our list of reasons to be concerned about further near-term retreat and/or underperformance by the mega cap growth trade. First, the rate of upward EPS estimate revisions for the top-10 market cap names is getting close to past peaks (89% currently, vs. major peaks of 90-94% in the past). This may be as good as it gets from an earnings sentiment perspective for mega cap Growth. Something similar occurred last fall, when the rate of upward EPS estimate revisions for the top 10 market cap names stalled at 86.5%.

Second, Nasdaq futures positioning on CFTC’s weekly futures update recently spiked sharply, though it admittedly didn’t get back to past highs relative to market cap.

Third, on the valuation side, we’ve seen a little improvement in the top-10 P/E, but not enough to say the froth that recently returned is out again.

On a related note, Semis were in the eye of the storm on Friday with a drop of 9.8% in the SOX. While we don’t yet have a read on how Semis valuations looked as of Friday’s close, what we do know was that as of the middle of last week, the median NTM P/E of the Russell 3000 Semis & Semi Equipment industry was a bit above post-TMT bubble highs, suggesting there was much work to be done in getting valuation levels back to a more reasonable place.

Semis have been sitting at a peak rate of upward revisions of late. We’re not seeing any degradation on that indicator as of now, but will be watching it closely in coming weeks ahead of the next reporting season to see if it provides another reason for profit-taking in this space. Along with war set backs and interest rates, we’ve had profit taking in Semis on our list of potential catalysts for a tier 1 pullback in the US equity market for the past few weeks. In a mid-May report, when we recapped our conversations from UK and Switzerland client meetings, we wrote: “Despite the appreciation of the earnings power of the Tech/Semis/AI part of the market, and some noting that they’d had plenty of exposure to it and had been performing well, there was a keen interest in exploring what other areas might offer better opportunities going forward, though several also noted it was difficult to understand what those would be.”

Moving on to Takeaway #2: What Else Jumps Out

• First, revisiting the Tiers of Fear. On our Tiers of Fear drawdown framework, a tier 1 / garden variety pullback (5-10% vs. peak) would take the S&P 500 down to the 6,849-7,229 range. As of Friday’s close, the index was already down 3% from the peak. Deeper drops generally require recession fears to return in a significant way.

• Second, the decline in bitcoin that’s been seen of late supports the idea that rotation within the S&P 500 may be turning into derisking. The pullbacks in the S&P 500 in early 2025 and early 2026 were preceded by drops in bitcoin, and bitcoin and the S&P 500 were fairly correlated with one another in 2023 and early 2024.

• Third, the Russell 2000 got hit nearly as hard as Nasdaq on Friday in the aftermath of the NFP report. While the print was a surprise, the Small Cap benchmark’s reaction to it was not. While Small Caps tend to outperform when ISM manufacturing is rising (a trend confirmed in Monday’s update for May) and jobs growth is accelerating (a trend in place if we overlook the fact that the May NFP number came in a tiny bit below the revised April number), they have also tended to underperform when hikes are baked into the bond market in recent years or when 10-year yields move up.

Before we wrap – a final thought.

• Tier 1 pullback risks have risen, and mega cap Growth leadership may stay paused a bit longer, but there has been no change in our longer-term, constructive S&P 500 outlook over the next 12 months or our 7,900 price target, which we’ve been describing lately as higher but not heroid.

That’s all for now. Thanks for listening. And, very importantly, don’t forget to vote – the last day to do so is this Friday, June 12th.