Why Top Strategist Lori Calvasina Remains Constructive on Stocks
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welcome to the risk reversal podcast i'm dan nathan i am joined again by lori calvisina she is the managing director and head of u.s equity strategy at rbc lori welcome back to the pod thanks for having me all right you and i see each other a lot okay so i have this great relationship with rbc capital i've been a consultant to their group for over a year their tech

investment banking. I just want to get that out of the way. I think a lot of our listeners know that and they are a sponsor of this fine podcast. But you and I have been doing CNBC's Fast Money, I want to say for years. Is that correct? I started pre-COVID, I think when Melissa was on maternity leave and kind of guest trading, I guess is what we call it. And then have done that periodically on and off since then. All right. But you smarten up the panel. Let's be very clear. We're a bunch of stock jockeys. You bring the goods here. All right. Let's talk

podcast. You last came on February 7th of this year. It was a really interesting setup because I don't think anyone knew that the market was about to top out. I think that your view was probably that things had gone too far too fast. We had that ramp really from the election into January. Some stuff started to roll over in the stock market a little bit. We started pricing in tariffs. It was part of the commentary, but I don't think anyone thought it was going to be rolled out

the way in which it was, you gave us some different scenarios. There was baseline, there was a top line, and there was a bottom line sort of situation. So we're going to talk through that. We're sitting here today at RBC's private tech conference. You and I have been sitting in on a lot of really interesting conversations with company founders, some investors and the like. So maybe we'll take a little bit out of what we heard

really about AI for the most part here and anything else you want to discuss. So, all right, let's go back to February 7th. Coming into the year, let's talk, I know you don't love this, but let's talk targets. I think you were probably, you know, in the mid-level of some of your peers. Does that make sense? You came in at what? Yeah, so I came into the year with a

base case. So the official year end price target is $6,600. And I think that was about the median, to be honest. And my targets are usually around the median. We also had what we called a bear case. And I don't normally do this. Usually I'm just kind of a one target girl. But we had multiple scenarios because we did feel like visibility was clouded. Right. And we felt like this was going to be a tough year to call. So we had the

bear case ready to go. And I believe that that was 5,700 at the time. And then, you know, you sort of fast forward March 17th. And I remember the date exactly because it was shortly after my birthday. Fun birthday weekend for me. But at any rate, we adjusted the targets lower. So we moved from 6,600 on the base case down to 6,200. And then we also took that bear case down to 5,550. And then later on, we can get to this later, we

pivoted to the bear case from the base case. But that's sort of where we were was we just felt like this was a year where forecasters had to be humble and acknowledge that, you know, and we should acknowledge this all anyway, right, that we don't have crystal balls. Our job is about navigating as much as forecasting. And we felt like the navigation part was more important this year. And just, you know, we couldn't be tied to any one scenario. If conditions changed, we had to change with it.

Give me a sense of, you know, after two consecutive years, 23, 24, we had 25% consecutive gains. We haven't had, you know, a performance like that in a very long time. And so you did have a little trepidation, you know, coming into the year, that sort of thing. And when you think about it, you know, the S&P in January closed at about 5,900 or so. And so we got up to 6,150. It felt like, OK, we're still on track for a whole host of things.

What were some of the things, let's say, outside of trade, which was really a big part of the uncertainty? I think that was one of the big reasons why you had these three different scenarios. What were some of the other things? Were you focused on valuation at the time? Are you still focused on valuation? Yeah. So I would say if I think about sort of my arsenal and, you know, I tend to be pretty

regimented in terms of my process. And we have things we always look at regardless. And one of those is valuation. One of those is positioning. And on the positioning side, we follow the CFTC data really closely. And we had actually said coming into this year, things were looking pretty stretched. And we were basically, you know, sort of they're

Lots of different ways you can parse this data and calculate it, but basically you are back to peak levels and levels that had proved troublesome on some gauges in early 2018, other gauges early 2020. But we looked at that in particular and said, if we get bad news, we are ripe for some reversion. That sort of the capacity of the market to absorb bad news wasn't terribly high.

And you saw the same thing on the valuation side. You know, if we look at top 10 PEs, you know, the biggest market cap names, we looked at the rest of the market. And both of those were kind of bumping up against ceilings that had proven problematic in the past. It's always a struggle to identify what are the catalysts that make those things reverse. And, you know, sort of the main thing we knew to start the year was, you know, it was going to be tricky because of that.

The last real sell-off that we had, you have to go back to mid-2024, and it was right during, kind of we topped out during that earnings season. I think there was a lot of enthusiasm about that MAG7 trade, and they were powering a lot of the gains of the market. And I think that, you know, in those kind of Q2 results, we just didn't have the sort of...

guidance that would kind of get you to these much higher targets at the time. And so we sold off nearly 10%. But like most of these sell-offs over the last couple of years, it was kind of a V reversal. And then we just kind of made a series of higher highs going into February. Talk to me a little bit about this phenomenon that you have. It's just V reversal after V reversal. And it seems like investors are kind of conditioned to kind of buy the dip. I know we've heard that for a very long time.

Well, you know, I spend most of my time with institutional investors and, you know, and I even see this today, right? You talk to stock pickers, people who aren't trying to solve all the macro problems, right? They check in with me every now and then for that, but they're just focused on buying good companies, good management teams. Those people are still, you know, even though they do have a lot of macro concerns, looking for good management teams to buy, right? And trying to figure out, you know, kind of where they want to be longer term. So that's part of it.

But I think there's been a big change on the retail investor side. And so I started in the business back in 2000. And I remember my very first boss to explain. Yeah, I literally got the job in March of 2000 and started in June. They were giving jobs to poli-sci majors. That tells you all you need to know.

But I remember my first boss who had been a strategist, you know, for many, many decades at Smith Barney, you know, him sort of explaining to me, like, you look at the funds flow data and you do exactly the opposite of what retail investors do. And so when they're buying and they're peaking, you want to get out. And when they're, you know, really, really selling, that's when you want to get in and you look for those extremes. But that's not really how we use funds flow data anymore.

And as I've talked to different contacts in the financial advisor community, and even frankly, my own father-in-law, they will tell you that individual investors have been trained not to sell at the wrong time. And I think that's really because a lot of this high net worth money, they're not calling the shots themselves. They're using professionals who are trying to make longer term arguments for them or help them understand the longer term case for staying involved. And

Frankly, I had one, you know, F.A. tell me a number of years ago, I think this was in 2022 during the big inflation spike. And she said inflation is actually making my clients want to buy the dip more because they know they need more for retirement now. And I thought that was just such an interesting comment at the time, really just helped me understand how the dynamics on the ground had changed.

Well, another aspect of the fund flows is that there's so much more passive investing now than existed 25 years ago. So a lot of the data you see is probably not that helpful in that regard, at least if you're trying to parse out some of the retail stuff. It was a paradigm shift, right? And this, I forget exactly what year it was, but I remember when sort of ETFs became the big thing. And frankly, you know, it's hard to know when you look at funds flow data

what's retail and what's individual because so many institutions use that ETF as a way to get in and out of different asset classes. You know, I think while we're pulling on this string, you know, about things that have changed in that funds flow world, I do wonder how much of that passive money has been coming from international sources to buy the U.S. And now, you know, we're sort of seeing this whole question about the international investor. Do they still want to buy the U.S. as much as they did in the past?

we can probably watch some of that passive data to see if there's a bit of a slowdown there. Yeah. And so buying the dip is kind of interesting. A stock like Walmart. So we're recording this on Thursday. It's kind of into the close right now. And the stock opened down, I think, 5% or so. The company issued their earnings. And one of the points I think that kind of spooked investors a little bit is that they were basically warning and saying that they're only going to be able to absorb $1.

so much of the cost increases that they are incurring because of the trade war. And I think a lot of folks, this is a really important data point. Like I think a week after, you know, the White House really caved for all intents and purposes, but they've left 30% tariffs on Chinese goods, which

Make no mistake about it. That is a 30% tax that did not exist like sort of six months ago. So when you see a company like Walmart issue that sort of commentary, is it actually bad for consumers, good for Walmart because they're going to pass through a lot of these costs and then explain to me why the stock sold off 5%. But

The dip was bought. It's basically unchanged as we're kind of heading into the close right now. Yeah. Look, I think that investors right now are grappling with short term and long term. And I think we're all still trying to figure out what the implications of that, you know, kind of rollback the tariff policy means. You know, we put our weekly out generally on Monday mornings, not always, but generally. And of course, I had to sort of rewrite something Sunday night. So, you know, happy Mother's Day to me. But the

you know, the thing that we sort of said was, we're not going to make any big decisions right now. We've got two weeks of retailers in particular and some ag companies and other, you know, sort of tech companies that are exposed to this tariff issue. I want to see what they have to say before I make any big decisions, you know, and I think this is a moment where it makes sense to be a little bit patient with markets. We've, we had a, a,

big move down. We had a big move up. Gappy markets are not necessarily always healthy markets. So, you know, the fact that we saw that big move on Monday just kind of reinforced to me, it may make sense just to be patient and listen right now. Yeah. And what my takeaway is of being in the business, you know, a little longer than you, you know, I go back to that 2000 period you said you started, or at least got the offer in March of 2000. It was a protracted bear market.

It was a long recession, too. And there was a whole host of things going on at the time. We're really dealing with a bubble bursting. And kind of no one knew it at the time. We're also then 9-11, you know, towards the end of 2001. And there was a ton of just like things blowing up. WorldCom. Do you remember all that sort of stuff? Oh, I had front row seat to it. And, you know, I remember it was also the Iraq War.

war, right? It was the accounting scandals. There was a major shakeup on Wall Street. It was just one thing after another coming and hitting the market. And, you know, that analogy has been coming up a lot more in client conversations. Everyone's so used to like the big drawdown, the big rally, and you're off to the races again.

I look at S&P valuations right now and that same chart, whether I was looking at top 10 or rest of market equal weighted, cap weighted, hitting the ceiling came down. Guess what? It never even hit the long-term average in that 20% drawdown we just had. So we didn't get to a place where S&P valuations at least are so washed out. You just got to buy the dip. All right. Is that because estimates, it happened so quickly, you didn't see estimates come down enough?

Isn't that part of it? I mean, a lot of analysts were taking or strategists were taking a wait and see approach also. So if you look at the rate of upward revision so that, you know, if I think about one indicator I've used previously,

throughout my entire career. It's been the rate of upward revision, so earnings sentiment, the percent of revisions on the sell side that are to the upside just for the broader index. That actually fell to 28.5% for the S&P 500. It's now rebounded, I think, to around 34, 35% on our last update. That 28,

28% level is about as bad as earnings revision sentiment gets outside of things like COVID, outside of things like the GFC. If you parse it and look at the top 10 market cap names, so that MAG 7+, it went down to like the low teens.

and did get to those kind of crisis-type levels. So the magnitudes were not huge, but the impulse to pull numbers down was very broad and very severe. But the companies have all been saying, we can mitigate this away. We can pass things on through pricing. Maybe the consumer companies are a little more complicated, but anyone that sells to a corporate customer, trying to send a message of confidence, we can manage through, we've got inventory, we've got these strategies.

And so they did calm people down. The question is, how well are those mitigation strategies going to work? Do they really have enough visibility? And by the way, what's going to happen with demand? We still have a lot of uncertainty out there. There's still so many unknown questions right now.

Do you think consumer data, which we saw weakening, and that makes sense, it's obviously backward lurking. Do you think if you're talking about demand, do you think that's something that is likely to rebound also? Well, what we know from the consumer companies, and I haven't sort of looked at the ones that have reported this week, but we also watch conference transcripts. I mean, that's why I'm here, right? I'm just consuming any breadcrumb of information I can get from any company in any vertical. But what we know from sort of the conference circuit

and some of the companies that did already report is that consumer behavior, even though they haven't retreated in terms of the dollar spend, the composition of the spend has changed. So you're seeing plenty of companies saying, we're seeing pressure on snacking, we're seeing pressure on smoking, we're seeing big ticket items.

you know, delayed. Some of the more discount-oriented retailers are seeing higher income consumers move down. So there has been an impact to consumer behavior. It just hasn't, you know, been resulting in the consumer crawling under a rock because the jobs are still there. Yeah. And, you know, this brings me back to what I started with as far as that protracted bear market 2000, 2001, 2002. All three years, the market was down.

And if you think back to what we had during the financial crisis, we had one down year, that was 2008. And then if you kind of flash forward to COVID, we didn't even have a down year, if you think about that, which is absolutely insane, right? And so when we talk about the dip being bought, we talk about investors willing to kind of wait it out and not take a whole heck of a lot of risk when things don't feel particularly good. That seems something from like a bygone era, if you will. Like it seems like investors and primarily institutions already

are waiting for these sorts of disruptions in the market, which was obviously a lot of Warren Buffett's strategy over the last 40 years or so. Well, if you go back to our funds flow conversation, right, while we've seen this structural inflow of money into passive, most of these categories, and I say unfortunately here because these are my clients, these are the people I spend all my time talking to, but the actual...

managed funds are generally seen outflows most of the time. And so a lot of this, you know, it's not just picking the best stock, right? I think a lot of them wish that that was all they had to do was just pick the right name. You have to get the allocation right. You have to do that in the context of rules and caps on how much you can own because of institutional issues.

And so a lot of them, you know, the way they sort of, one of their mitigation strategies, right, is looking at these dislocations and really taking advantage of these liquidity opportunities. Yeah. So what's, I think, different this time when I think about the sell-off, the speed in which it sold off, and the S&P at its lows was down about 20%. And here we are, you know, we are, and that's from the highs, okay? I think the S&P at its lows might have been down 10%, 11% for the year. Does that make sense? I forget the, I forget.

the year to date number, but we watched that, you know, sort of move from peak very closely. And I think it was 18.9%. And that was important because we had this framework, easily the most popular chart in my marketing deck this year was our four tiers of fear. I don't know if we talked about this on the last podcast. I think I may have like put this together slightly after that, because we had started to get

questions from different corners of the market, hedge funds, retail, you know, people who are quite worried and wanted to understand drawdowns. And we said, you know, garden variety is tier one, five to 10% drawdown. Tier two growth scare was where we saw the risk building. That was a 15 to 20% type drawdown, similar to 2010, 2011, 2015, 16, and 2018. Recession pricing was tier three.

And that's like a 27, 32 percent type drawdown. And we said, you know, we don't think we're going to have a recession, but we see fear of that, you know, kind of recession growth scare, essentially big crisis fear of it, which it doesn't manifest. That was really what we were concerned about. And it was so fascinating to me to see that's exactly where the market bottomed.

right in line with the kind of low we saw back in those kind of post-GFC pre-COVID growth scares. Well, we're going to talk about why we think the market bottomed and had that reversal. It's had a lot to do with, I think, the White House literally giving up on the entire trade war. As it relates to China, they talked a really big game. They put some massive reciprocal tariffs on. And then within a few weeks, they got rid of them. Why? We saw predominantly the volatility or downward volatility in the stock market, but

the upward volatility in the 10 year yield. Right. And so one of the things that I took away from this entire two month period where if the White House and the Treasury secretary are telling you they don't care about the stock market and they're targeting the 10 year yield. And I want to talk to you a bit about why you think they're targeting the 10 year yield. I think it's kind of obvious, but I want to get your take on how that makes sense to you, what they're trying to do with yields. But it was a whole host of things. The dollar being sold.

Treasury is being sold. It goes back to the point whether you're starting to question whether foreigners want to own our assets a little bit. So what happened in your opinion a few weeks ago when the 10 year yield traded 4.6? Because I want to remind our listeners it traded 4.55.

yesterday on Wednesday here. So give me a framework on why you think there was such a sharp reversal given what appears to be a lot of uncertainty, but also some movements in macro assets that haven't changed a whole heck of a lot in the last few weeks. Yeah. So if I'm just thinking about, you know, sort of the moves that we saw, right? So we kind of hit in equities, kind of this natural growth scare, like limit, right? Kind of the outer bound where like real fear starts to seep in. And I think that fear, you know, started to be at

code, right? We really started to see it show up. If I think about, you know, kind of my conversations with investors right before that period, I want to say like, you know, I'm thinking of a dinner I did with my derivatives team, just other client conversations, especially with kind of more of a faster money crowd, there was a real debate over whether or not there was a Trump put. And whether it was the stock market, you know, the bond market was starting to come up just because of all the comments that had been made. And I think

you know, there really started to be when we kind of hit that 18.9% doubt. You know, there was real doubt that there was one. Well, there was tweets going out to buy stocks. I mean, so that was kind of the point I was trying to make, and I didn't square the circle here a little bit. So if they're telling you they don't care about the stock market and it goes down 19%, and then they tell you to buy stocks, you should probably listen to them at this point. Well, look, you know, my lesson from 2018, to be honest, is...

You know, we saw that sometimes things can get out of policymakers' control, right? And so that was kind of the comment we were making to a lot of people in March and April, you know, because we did talk to a fair number of people who thought that the put would kick in eventually. And we said, you know, sometimes, you know, when recession, that word starts to be used and there's real fear, sometimes there's nothing Washington can do, right? That just has to play out. And we were starting to get to that point, I think.

Yeah. So your point about 2018, if people forget, in the Q4 of that year, the S&P sold off, to your point, about 19% or so in a very short period of time. But it felt a lot more orderly than what just happened here over the last month or so. Well, you know, it was interesting. That was a year where we had a couple of bumps. Now, it was very similar to this year in that positioning gauge I mentioned to you. Very peaky that year. Valuations also similarly stretched. We had that 10% low vol unwind, you know, kind of in...

What was it, that January, February timeframe? The trade war really escalated in March. And there was actually a buy the USA trade. Like people felt pretty good. Then people started worrying about QT. They started worrying about the Fed. And then in September, conferences like this one, the industry, I was at our industrial conference at the time, but companies all came out and said, oh, the tariffs are going to be a problem.

And investors started to get concerned about growth again. And then we just had a massive retail exodus, you know, sort of in December. December was just a brutal month, but it happened in dribs and drabs. It was orderly, but it just was relentless and it just kept coming back.

And finally, you did have to see some shifts in language from the Fed to really get the market. All right. So that's where I was going to go to next. I mean, when you think about what just happened here, it's the president and it was the treasury secretary, really, and the commerce secretary driving a lot of the narrative. Back then, it really was Fed Chair Powell. He's the one who did the pivot. And we had gross scare. And then we had the fear that he was going to continue to raise interest rates. And so

How do you think the Fed fits into this whole conversation over the last couple of months? Because I thought the last meeting, which was a few weeks ago, and he was asked directly about pressure from the White House.

When would he start cutting rates? What would be the conditions? And he basically said, you know, we're staying put. We want to see how the data comes in over the next few months or so. And when you think about Fed Funds futures, they're not actually pricing a whole heck of a lot more than they were for two cuts when we came into this year. So how are you thinking about the Fed and really their role in this?

So, look, as I talk to investors, I think, especially the last few weeks, and I'll say the Fed's not top of the conversation. It's really been more tariffs. I do think, by the way, if we back up just one, I think the reason why this latest bout of de-escalation worked, and I had said this in my note, which I rewrote on Sunday night, but I forget the exact words, but it had to not just be substantial. It had to be tangible, and it had to have some immediate impact.

And I think we got that. I think, you know, even the expectations I saw floating around online Sunday night about like kind of what this deal would be, those were surpassed on Monday morning, right? So I think you had to see real clear signs of progress on the policy front to get the market to do what it did.

On the Fed side, I think investors have an appreciation that they're stuck between a rock and a hard place. And investors are worried about inflation. They're worried about employment. When I, you know, talk to think about some of my conversations recently, there's a real concern about, you know, some of the layoffs that happened down in Washington. Those are going to take some time to filter through the system. And we may not really start to see the impacts of those until, say, August, July, even June.

right when we're in the next reporting season, right? So, you know, there's a real concern. And I think investors are kind of in wait and see mode. And I think they're giving the Fed some grace and some patience on that.

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Alright, so June 18th, the next Fed meeting. If we do not hear a more dovish tone from Powell, what are the effects on the markets? You know, right now, we have a VIX that's at 18. We had a VIX that was very elevated in the 20s, I want to say for weeks throughout that whole period we have. It just seems like a lot of these macro risk assets

have obviously calmed down a bit. Crude's back above 60. Gold's come in about 10%. You know, my view has been, forget the VIX. I want to look at the 10-year yield in gold, and they're really going to be the new volatility indicator in my mind. But the outlier here is that 10-year yield. So if we get to June 18th and the Fed remains, let's say nothing changes other than we've flashed forward a month, how do you think the markets take that?

Well, so, you know, and I haven't checked this stat today, but last I saw, I believe like the futures markets were pricing fewer cuts than they were before. And as I've sort of looked at the forecasters around the street, I do think there's a lot of variation in terms of forecasts that are being made. So I don't know that I'm necessarily looking for like any one outcome from an equity perspective. I also think, frankly, it depends on what the rest of the data is looking like at that

point in time? What's the inflation data looking like? What's the employment data looking like? Do you think the inflation data, so we got CPI, I want to say earlier this week. And, you know, I mean, the headline was that it's going towards the Fed's target here. But then now they think, you know, when they have this dual mandate or they've always had the dual mandate, you know, so like they basically were waiting on inflation data. But are they also still worried about the jobs situation here? I think that they I

From what I've gathered, I think that they are. And I will say on the inflation side, what our economists said in the note they put out was, you know, we didn't see the impact so far, but it's still a little bit too early, right, to see the impacts of tariffs from inflation. We know that some companies are starting to pass prices on, but a lot of companies have also built up

a lot of inventory. I know I'm getting a lot of stuff in my personal inbox about, you know, you should buy stuff now because we've still got pre-tariff prices. So I think that, you know, I think there is a recognition that this stuff would not have really shown up in data yet, but that doesn't mean it's not coming.

Yeah. And all right, let's talk about 10-year yields for a second here. We talked a little bit about what the Treasury and the White House is targeting, but it's done the exact opposite. And that was kind of the problem a few weeks ago. It went up 4.6% as stocks were selling off. I think that was some added fuel to the fire. So here we are on Wednesday. I think we got as high as 4.55. Here we are at 4.45 right now. What's the deal here?

You know what I'm saying? To me, I would have expected with the stock market back up and a whole host of calm on the policy front, at least for now, that you would see yields back towards 415, which they were weeks ago. My sense is, and look, I'm not a cross-asset strategist. I'm just an equity person. But when I talk to my colleagues, especially the ones sitting overseas, I personally have come to the

conclusion that the international investor angst and this question over whether or not you own U.S. assets, that seems to be playing out more acutely in currencies and fixed income than it is in equities.

And when I look at the EPFR data, even that data has calmed down a bit now on outflows from U.S. bond funds. But when the outflows were happening from U.S. assets, it did look to be a bit more severe in terms of what I saw in that bond data. So that would be the first thing is it feels almost like equities are the tag along story here as opposed to the real sort of central issue. But I would say if I think about 4.5%, that's been coming up in meetings recently,

how worried are we about that from an equity perspective? On the one hand, we always care because if I look at effective interest rates on debt outstanding for S&P companies or Russell companies, it doesn't peg to the Fed funds rate. It tends to track 10-year yields. And that interest expense line is a big component of my earnings model. So if we raise interest rates, it worsens that interest expense line. It's just another headwind we don't need for equity earnings.

But if I put all that aside and just model it out, 4.5% I can live with, right? It's more about the approach to 5% is when we start to see things like my earnings yield gap model enter into a range that's onerous for equity. So I think we still have some wiggle room, but...

I understand why this is at the center of the storm from a couple of different angles. All right. On equity valuations, really quickly, if we see the dollar stay, the Dixie, around 100, it's at 101 or just a little bit below that. I think it's up a few percent from those recent highs, but it's down from 110, I want to say a month, month and a half ago. So let's say we see the dollar kind of hang out down here. Let's say we see yields kind of moderate a

little bit over 10 years. Let's say we have a slightly more dovish Fed next time we hear from them. Shouldn't that be a tailwind to U.S. multinationals? Well, the dollar certainly. And I think with the 10-year, it depends on how much. But it's funny, when I go through all my modeling, people always expect these dollar moves to have a big impact on EPS. And it doesn't really flow through to my earnings model in dollar terms. But we sure do notice that there's an inverse relationship between the rate of upward revisions and the dollar year over year. And

when you tend to see the dollar weaken, it tends to strengthen your revision ratio. I noticed in this last reporting season, I mean, we got deluged by tariffs, whatever that two-week period was where we got 300 companies. Tariff, tariff, tariff.

And then I noticed the health care companies started saying, well, the dollar is really a lot weaker. And I don't think the health care companies had too much to talk about that was good. But they started talking about the benefits of the dollar coming down and how that was affecting their guidance. And then we've noticed as the reporting season has slowed down, more and more companies are talking about

that. And there was one company, I forget who it was, but they said, you know, technically the dollar is still a little bit of a headwind for the year. We felt most of that in the first quarter. It's shifting in 2Q and it's going to be a tailwind by the second half of the year. And that's, you know, I don't want to call it a silver lining, right, of this whole tariff episode, but that is one of those sneaky little mitigation factors in there that's allowing earnings, you know, the

estimates to come down, but not in a horrible way because they're getting some sneaky benefits in there. All right. Let's talk about the SPX here. So the S&P 500, it's 5,900 or so at the highs of the year in mid to late February. It was trading at 6,150. Okay. So we're basically 200 and change off of those highs, but we're 1,000 points off of the lows. So give me a sense of what you think the range is for the S&P 500. The lows are probably in for

this year, right? We would need like a hardcore recession. We'd need to see the trade war really get ramped up again, which by the way, could definitely happen if you think about the way like policy was implemented and then taken off and that sort of thing. Where's your time? I know this is hard, but where's your time?

You know, where do you see the end of this year? And we're not that we're six and a half months away or something like that. Where do you see the S&P shaking out, assuming that things don't change a whole heck of a lot on the policy front? Let's say we don't have a huge move in the dollar. Let's say, you know, 10 year yields. Let's say the market is like 415 at 4.6 or something like that. Where do you think the S&P shakes out? So, look, I would say the last time we updated our target, we did it right after Liberation Day. We pivoted to the bear case.

Even when we pivoted to the bear case, so our official target is 55-50 at the end of the year, there was a whole range of outcomes. We have five different things that we use, and 55-50 is like the average and median, like right around both of those. And, you know, at the low end, our economic test, which may be a little too conservative now, but we were baking in, you know, sort of stagflation, half a percent GDP. That was pointing to around 4,900 on the S&P.

right? That was at the low end. If I looked at my sentiment model or I looked at my cross-asset model, which somehow is still in favorable territory for stocks, that was getting you closer to $6,000. If I look at my valuation modeling, which is where we come up with a target PE for the end of the year based on different sort of outcomes on things like inflation, tenure yield, and fed funds, my modeling at the time put that at $53.51. And so that was baking in kind of a very severe stagflation environment.

What we've been publishing recently, and this has come up in meetings this week, is let's just look at what the consensus says. So consensus earnings of, I think, what are they like? 260, I forget, it was 265. There were 275 coming into the year. Yeah, so those have come down to like 265 on the bottom of consensus. If you take that and then you just take consensus assumptions on inflation, which is a little over 3% on PCE, 10-year yields, last I checked was like around 413, and then like two cuts from the Fed.

You bake all that in, you come up with the target PE, bake it all together. It's giving you between like 56 and 5,700 on the S&P. So not too far from where we are right now. Yeah, but right now we're like close to 23 times. If you're looking at 260, you know, for S&P 500. We tend to look at

trailing earnings as opposed to forward. So our macro model is forecasting the trailing PE on December 31st at the end of this year. And I think that would be like a 21 and change is what it's forecasting. A totally separate tangent, but this model has been telling us to look for PEs in the low 20s for the last few years since we introduced it. And it's been fairly accurate, but it has been kind of going against sort of that consensus that multiples are too high. All right. Last question.

What is your model telling you, sectors, that you want to be exposed to right here in this environment, assuming that, again, the assumptions that we made right there, we have a sort of base case. You're either hiding out or are you looking to get a bit more aggressive? So we actually haven't made any changes to sector allocation through all this. We've moved our target a couple times, but we've wanted to play a mixture of offense and defense. And we've also had our favorite growth sector, Baker.

in. So on the defensive side, we think utilities is the cleanest way, pretty solid earnings revisions versus other sectors, not really caught up in any of the policy debates, and it's a little expensive, but not crazy. So that's our defensive play for further volatility. If you think about on a more offensive side, we've liked financials. They were a little expensive. They've gotten cheaper. The regional banks have looked cheap all along. They're very tied to consumer sentiment on the University of Michigan survey. They tend to

outperform when sentiment rises and underperform when it falls. And so when we've looked at that University of Michigan data point, it's actually already back to recession lows. So as a strategist, I know how painful that is. And everybody always hates it when I make these kinds of calls. But you want to look for when it's going to move. And we're never going to catch it ahead of time, right? So we like the idea of being in financials for when and if you get that term when people start to feel just a teeny tiny bit better.

And then on the growth side, we like comm services. It's got a mix of offense and defense. Aside for the five minutes when they were talking about tariffing movies, it's also been another politically, you know, kind of agnostic sector with reasonable valuations now looking much cheaper and better earnings revision trends than what we've seen in most other sectors. I will say the one sector, you know, we're sitting at the private tech conference, so this doesn't necessarily apply here because these are private companies, but the public tech.

tech sector. We're neutral technology, but we have noticed that valuations have moved from, you know, kind of frighteningly expensive on our model last year, and they're down kind of back to neutral now. So we think that's been a really interesting place where some opportunity has probably gotten unlocked. Lori Calvisina, thank you for joining us again. I'll probably see you on Fast Money at any moment over the next couple of weeks, but I really look forward to it. So I appreciate you sitting down with me here. All right. Thanks for having me on.