RBC Capital Markets' Lori Calvasina: Market is dealing with 'sticker shock'

Core Viewpoint - The market is currently experiencing valuation concerns and earnings revisions that are not meeting expectations, leading to a cautious outlook for the short term while remaining constructive for the year ahead [1][2]. Market Valuation and Earnings - Valuations have been hitting a ceiling since August, with major indices like the S&P 500 and NASDAQ 100 close to their typical highs [3]. - There is a sense of "sticker shock" in the market, indicating a need to work through current valuation levels [4]. - Earnings sentiment, measured by the rate of upward revisions, has shown fluctuations, with a recent improvement to 55% after dropping to 51.9% [11][12]. Small Cap Performance - The outlook for small caps is neutral, reflecting a lack of a hot economic environment necessary for sustained outperformance [6][7]. - Hedge funds tend to invest in small caps during optimistic periods regarding Federal Reserve rate cuts but exit once that optimism wanes [8]. Sector Analysis - The industrial sector is currently the most expensive based on median price-to-earnings ratios, surpassing even the tech sector [18]. - Consumer companies, particularly in staples and discretionary sectors, have reported disappointing earnings, indicating potential weakness in consumer sentiment [19][20]. AI and Technology Impact - There is a divergence in earnings sentiment between AI technology builders and users, with builders showing positive sentiment while users are not experiencing transformational impacts from AI [15][16].