Lori Calvasina Talks Recession Pricing, S&P
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Bloomberg Audio Studios. Podcasts, radio, news. The market is lower than the futures at 929. The VIX, Paul, please, I can't do it, Paul. Quote the VIX, it's too much pain. Well, I'm just learning the S&P 500, technically a bear market right there at that low here. But we've got the VIX here.

How about that, Tom? Five zero. Five zero point six four. And I did a standard deviation study. Lori Calvacina said she wouldn't come on if I didn't do bear market bull market calls. I got to do standard deviation calls. And we're out at three point three standard deviations down. Standard and poor is five hundred. One step down, two steps down. And this morning, three steps down. We are honored that Lori Calvacina would join us here in this hour. Lori, your observation as you speak to your clients this morning.

Look, I think people are trying to make sense of what's going on, how far we could go down. You know, just a few minutes ago, I had an email with someone who was talking to me about my four tiers of fear framework and said there's a lot of sympathy among my clients for your 3100, which is the fourth tier.

here where you have a major crisis and lose half the market value. I'm not going to sit here, Tom, and tell you everybody saying that, but that was one email that came across. Whereas other people have sort of resonated to the idea that we said, you know, we've been in a growth scare. The risk now is we're pricing in recession. And it sounds to me like just based on where we open, we're headed straight for that. So I think that people are doing what we do when we have these events in markets where there is a fear that is cascading very rapidly. Right.

What we're going to do here now with an equity strategist is take all of her wonderful abilities, particularly with less profitable, non-Apple, non-Microsoft companies, and bring it over to what people are talking about with the Dow negative 1400. Lori Kalfasina,

Take the equity market and what it will bounce off in a credit market that deteriorates. The jargon that Paul Sweeney uses is spreads deteriorate. That's the yield of a garbage bond versus a full faith in credit, and the yield goes higher. Are we at a tipping point in credit that affects the equity market?

It's a great question. I'm certainly not an expert on the credit market, Tom, so I'm going to deflect on that one. But what I will say is that maybe up until about a week ago, and it was a little bit before the Rose Garden ceremony, to be honest, but we had actually been seeing small caps starting to outperform large caps. And on the big down days in the market, small caps weren't doing quite as bad. And I thought that was interesting. That was making me feel a little bit better because they had already been so de-risked. They were so cheap.

And we felt like there was this rotation going on that was hitting the bigger caps harder than the small caps. But that's all changed. So we've seen that attempt that small caps were making to bottom now fail post the Rose Garden. And that's going to be very similar, right, to that high yield cohort of the market. And what that's been telling me over the past few days is that those recession risks are getting priced in rapidly because as cheap as they are, and honestly, Tom, my valuation PE for the –

my valuation model, the market cap weighted PE for the Russell 2000 was at 13 and a half times on the Thursday close. In a recession, it tends to go to 11 to 13 times even before you clean up the excess earnings optimism. So these things have been acting pretty, pretty bad. But I do think that credit

market's holding up, not deteriorating. You know, that's been sort of the thing that's kind of kept people out. And I hate to use the word panic in markets like these, but that's been kind of the thing that's kept people calm. But that may be a necessary part of the bottoming process we have to go through in here. Let me uncalm you right now, Paul. The VIX, 52.07. Exactly. Lori, what's the earnings risk still out there in the marketplace, do you think? I mean, is it a flat earnings year in 25 or maybe something more than that?

You know, what we've got modeled is, you know, kind of a stagflationary scenario right now for 258, which is well below the bottom-up consensus, which last I checked was 269. Who knows what it is now because things are starting to change. But what we have found is an interesting question you asked, Paul, because if you kind of go back and look at bad...

earnings years. What we often find is that in big crises, big recessions, you're seeing earnings growth on a year-over-year basis going down like 13% or something worse, so some big, ugly numbers. But there are actually a lot of years where earnings are just flat year-to-year. And when we see companies being able to muddle through, that's often what's happened. So when we

recently changed our earnings number to 258. We said, you know, kind of the downside scenario, if we want to kind of put in a bear case, we're thinking a lot about kind of that 246 number for now. That could change if we go into a full-on recession. But outside of that, that's not a bad assumption to make, just that earnings go nowhere. Laurie, stay with us. We're going to continue. Laurie Calvisina, RBC with us here on the equity markets. Eric Belchunas made it up from Philadelphia. They didn't cut the funding on the Acela Express. Not yet.

get to Belchunas here in a moment. I just had a negative 1500 print on the Dow, negative 213. I want to emphasize futures at 929 were about negative 140. We're now negative 210 on the equity market. The VIX explodes out, that's the right word, 4748 at the 52.76. I never use this phrase, I'm going to use it, Paul. On a half hour to half hour basis,

to the Asia opening, we're sort of in uncharted territory. It's different. And Paul, the yields go up, up. There's a fear trade into bonds price, excuse me, price down, yield up, and the whole margin call. I'm sorry. I'm going where Dennis Gartman was earlier this morning. You wonder, Paul, what's going on out there.

of course and uh... i think uh... you know i was just asking uh... where do we go from here in terms of policy i'm not sure anybody really knows and i kinda goes to the earnings question like i don't know how bad earnings could get cuz i'm not sure how far this policy is going to go i think that reflects

a lot of what the market's doing. So, Laurie, I think most of us listening, watching here would say, you know what, 12, 24, 36 months from now, this market's going to be higher than where we are right here, probably meaningfully higher. So I should probably be doing some buying here. How does that conversation go with you?

Well, look, I'll tell you, it's sort of the fly in the ointment for the strategists right now. And I see this in my own modeling, Paul. We have five different models that we use to come up with our price targets. And look, I know everything is scary and people are like, math? Oh, my God, you're doing math? But that's what we have to do, right, to keep ourselves grounded. And when I go through and look at my modeling, the one model that's still pretty constructive is actually the sentiment model. And it's basically looking at AAII net bulls that are down around GFC lows, 2022 lows, 1999 lows.

on 91 recession lows. And that is a good reminder that as quickly as things cascade onto the downside, they tend to come roaring back when you get some resolution. And so I think that's something a lot of us forecasters have had in the

back of our heads as we've tried to navigate this environment. It's hard. It's impossible, right, to say what is that trigger? But it is something we have to watch and it's a necessary condition for a bottom that's already been put in place. Tesla not to a 200, 199. We're not there yet. I don't want to be too gloomy. But I'm going to go over here, Lori, to something nobody talks about. And of course, we're on a Canadian border on this. Ford Motor...

under $10, $9.11, right down on lows for 2025. And they got a PE multiple on Ford of five. And maybe the forward multiple, which we're going to blow up, we know that, is seven. Are we in value territory in medium and small cap stocks like we clearly are with the Ford Motor Company? So, you know, I was having an argument with someone about that this morning, Tom, because I was talking about-

Not my husband. I'm on a trip. I'm in a hotel room. So I believe he argues with me about plenty of things. The marriage survives. Yeah, but he's very scared of my tears of fear chart. I had to take some passwords away from him. But the reality is that when I highlight this small cap chart and that we're at 13 times, or at least we were as of Thursday, people say, well, we have to adjust the earnings. And I say, I know we have to adjust the earnings. That's a separate thing, though. If you look at

you know, sort of historically my forward PE data 11 to 13 times is where small caps tend to bottom out even when the E is too high. And people just can't mentally wrap their heads around that. But it is something important you have to keep in mind because it's one of those things, again, that you have to see. It's not going to peg a bottom on its own, but it's still a signal even though there's some problems with the E.

Now, I do think with earnings, we have to get the numbers down before anybody is going to have faith to come in and buy here. Forty percent of the revisions in both the Russell and S&P are still to the upside. Nobody's cutting numbers because they don't, you know, I don't know, a lot of different reasons, but nobody's been cutting the numbers. You're a trooper to come on, Lori. Back to our clients at RBC Capital. Marcus, Lori Kelvis Sr., hug the children is all I can say.

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