Entente avec l’Iran, économie résiliente, marchés turbulents

Eric Lascelles - Managing Director, Chief Economist and Head of Investment Strategy Research

Hello and welcome. My name is Eric Lascelles. I'm the Chief Economist and Head of Investment Strategy Research for RBC Global Asset Management. And very pleased, as always, to share with you our latest monthly Economic Webcast. This is for the month of July. I'm recording this at the very, very end of June and as the title likely shows in front of you.

We're going to talk about quite a range of things, but they will include this tentative deal between the U.S. and Iran. We will certainly acknowledge what appears to be a continued degree of economic resilience out there, particularly in the U.S. We'll also flag that financial markets have been a little bit choppy lately. Some of the perhaps traditional leaders in recent years, including the Magnificent Seven, are not actually leading quite as much right now.

So lots to cover off, and we'll try and put this all into perspective.

Report card: Let's start, as we often do, with a report card. And within that we're actually going to switch things up for the faithful viewer. We're going to talk about the positive instead of the negative first. And so let's do exactly that.

Again, the big news of relevance over the last month, certainly, is that there is now a deal between the U.S. and Iran.

And so functionally, this of course matters in any number of ways, including on the ground in Iran, in the Middle East. But equally, from an economic standpoint, of course, the supply of fossil fuels had been greatly pinched and that is starting to come unstuck. So ships are starting to flow through the Strait of Hormuz. Oil prices have fallen.

We'll talk about all of that in a moment.

Other bits of positive news or positive themes: we're observing and tracking bank lending around the world and there has been a significant uptick across a range of markets. That would seem to be a positive macro signal as well, we think. We'll spend a moment on the U.S. consumer. There have been concerns about the consumer and not much population growth and high gas prices and some other challenges.

Certainly those are constraints. But ultimately, there are some decent things going on for the U.S. consumer as well. And certainly that consumer base still matters a great deal.

From a global economic standpoint, we’re still seeing some resilience, as I mentioned a moment ago. Most of the high-level macro signals are good, not bad. And indeed, and this is no change.

Nevertheless, we're pleased to retain above consensus growth forecasts. So we are slight optimists even relative to what the market is assuming about what the future may bring.

Okay. On to the negative side of the ledger. Let's talk about that. And so concerns about the durability of that deal I just mentioned between the U.S. and Iran. There are certainly details yet to be worked out and they are not trivial details.

So there is a scenario in which this unwinds and we've still got a problem on our hands, which I'll speak to in a moment. We are still dealing with the aftermath of what has been a constrained Strait of Hormuz. And so inflation is still very much too high and the energy flow is still not fully normal and attempting to normalize, but certainly not normal just yet.

00:02:50:26 - 00:03:11:12

So that is a challenge and it cascades through to central banks, which have become more hawkish lately. And that includes the U.S. Federal Reserve, which gave a fairly hawkish signal in the first Kevin Warsh-era presentation. And so market’s thinking there may be some hikes in store.

We're a little bit less convinced, but we'll get to that also in a moment.

And then the choppy market side of things. So just to say that certainly over the last month it has been less up, up and away than perhaps the prior several months were. We’re seeing in a good way some breadth to the stock market and seeing some maybe not traditional leaders leading or at least participating in the increases that are happening.

Conversely, some of the prior leaders, including some of those hyperscalers, Magnificent Seven-type companies, not performing quite as strongly right now, and so raising some questions as that rotation occurs.

Lastly, just on the interesting file, well, I guess I've stolen my thunder here. So again wobbling Magnificent Seven versus a broadening market. So there's bad on the first part and good on the second part.

Another way of debating the stock market outlook in particular is you've got high valuations, which are not attractive as an investor. You have very good earnings momentum. They just keep being revised higher, which I'll show a bit later, which is quite attractive. And that's why people are willing to perhaps hold their nose and invest in the market, because you are being compensated in that way.

Indeed the valuations don't look as challenging a year or two later when the earnings growth is as remarkable as it is right now.

And then a little nod to Canada, which I'll get to in chart form a bit later as well. But we don't view the Canadian economy as having gone through a recession.

I know there were two quarters of decline. We think ultimately that didn't quite fit the bill, and indeed we're now getting some more promising data coming out recently.

Okay, so that's the overview, that really does frame where we're going to go. Let's go there. And so we'll move forward and we'll start talking again about this war in the Middle East, which has been so relevant in an energy shock context.

Strait of Hormuz starts to flow again: I'll start with this chart, which is ships – in fact, specifically tankers moving through the Strait of Hormuz, which is that pinch point in the Persian Gulf, through which 20% of the world's oil would normally transit. And so you can see how the volume of ships collapsed during this war.

You can see promisingly how there is a significant rebound, more rebound of the west to east direction, which makes sense. A lot of ships were stuck in the Persian Gulf and not able to leave with their cargo. So they're now successfully doing that, which of course matters a lot because that energy will get to market and will help to fix some inventory and some shortage issues, particularly in Asia and Europe.

You can see the gold line is east to west. So that would be are companies confident enough to actually send ships into the fray with the view that they will not just be able to secure the energy, but then get back out several days later. And so we haven't seen quite the same volume. But of course, those ships weren't necessarily positioned waiting to enter, but nevertheless a significant uptick there as well.

00:05:46:01 - 00:06:08:17

And so this is promising. Equally, we would like to see this increase continue. So we're going to be watching quite closely in the coming days and weeks. And of course, part revolves around just whether we can keep this deal on track. Because of course, there have been some small skirmishes recently and big debates as to whether there will or won't be a toll to transit the Strait of Hormuz paid to Iran and so on.

So good news in general, but maybe not quite fully resolved. I will say financial markets and the oil market in particular are very much embracing this and would seem to be of the opinion this is all done and dusted. This is all settled.

Oil prices have significantly reversed: You can see the price of oil here has really declined quite remarkably and is now, as I'm recording this, in the realm of $70 a barrel, which was really a fairly moderate price by the standards of recent decades, still a little bit higher than where we were before the war.

Do let the record show, as you can look back to late February here, there was an upward trend in place leading into late February that reflected, I think, increasing probabilities of a war. And so I would say maybe normal before all of this is closer to $60 a barrel than $70 a barrel. So we can't say it's been fully unwound.

But there are moments when the price of oil was $120 a barrel, as you can see on this chart. And so to get right back down to $70, albeit not all the way to $60, is significant progress – and I think to be celebrated, other than maybe in an oil stock context. Good for the global economy at least.

So this is significant progress. And this would seem to be, again, the financial markets betting that this will be resolved, even though we have seen some reversals. And there are still some questions around a few important items with regard to the peace deal.

So that's good news. Of course that then bleeds through to inflation and growth and some other things as well.

And in fact, let's talk about the inflation side.

Real-time inflation shows effect of oil spike and reversal: And so this is a real-time inflation metric we track. This is for the U.S. That blue line is the real-time bit. The gold line is just the actual Consumer Price Index (CPI) prints that come out weeks later. And so the blue line would say at this point, not that I know there's a mountain here.

And you see the blue line falling and it's tempting to say, hey, hooray! Consumer prices are falling. That's not quite true. What's happening is the rate of consumer price increase is diminishing. And you'll see, actually, the latest data point of that blue line is pretty much smack dab on zero. And so that would say, at this juncture, we're back to a point where you would think that consumer inflation could record a zero, which is good because the norm has been point twos and even a bit more than that, even before this energy shock.

And so already softer than normal as you start to unwind some of the damage that accrued in March and April and May. But equally, we think that blue line will go negative because of course, oil prices have significantly reversed. It's all a bit blurry because of course you've got these second-order effects and transportation costs and some things just starting to pick up that extra cost.

And so not in a position to reverse at this juncture. But ultimately we think that blue line goes negative and we are budgeting for notably softer-than-normal inflation prints as we work our way into July and August and September – unwinding some but we're not assuming all of the inflation damage that was done in the spring. But still, some good news here, certainly, if this can hold.

We'd seen economic resilience throughout, that's kind of been the key expression across this experience. But of course it is good news for the global economy as well to be dealing with $70 and not, let's call it, $100 oil, which is where oil was for a fair fraction of this experience.

U.S.‒­Iran deal framework: promising, but not settled yet: And then in terms of the deal framework, and so this is me pretending to be an expert in the legalities of peace deals. Nevertheless, I think we can kind of frame it loosely this way. And we can say there are some elements that are relatively straightforward and there are elements that are tricky – and frankly, not quite settled. And you may know, there's a 60-day negotiating process underway where they need to get to a conclusion on some of these, and it may not be all that easy.

So speaking to the risk that persists, nonaggression against Iran is pretty straightforward. In exchange, lifting sanctions on Iran. This is very attractive to Iran. The expectation here is the sanctions will be lighter coming out of this than they were even before the war, because of course, there were significant sanctions at that point. So very much to the Iranian economy's advantage.

You end some UN resolutions and, over time, some atomic energy resolutions if Iran complies with some of the expectations here. So that part is, I think, fairly straightforward, if not immediate in every case. The trickier bits are the four items at the bottom. And so one would be can this war actually be ended on all fronts, which would include in Lebanon vis a vis Israel?

And so the hope is, ‘yes.’ The reality on the ground has not been as clear of a ‘yes.’ So that may yet be a problem. We will see. The Strait of Hormuz is a pretty central one. It's obviously the economically relevant variable here. And so the debate is will it just be fully open as it was before, with no country controlling it?

That's the hope, or will Iran charge a fee? That would be much less attractive, though it could be tolerable, just in a narrow economic sense. Because you're essentially talking about a dollar or two a barrel of oil, which is unattractive but equally doesn't make the energy coming out unviable. But it would set a dangerous precedent.

Or perhaps some bilateral arrangement where it's Iran, plus maybe Oman on the other side of the Strait, or somehow the U.S. is involved.

And so certainly the hope here is that it's open. That has been very much the U.S. message. Iran’s seemingly not onside there. So that is a tricky bit that has not been resolved. Pretty important part.

And then nuclear enrichment would be another big item. I would say we've heard comment on occasion that yes, it simply will be stopped and the stockpile will even be reduced or diluted or given to the U.S. or some variation on that.

But, you know, the details still need to be sorted out here.

And then finally, compensation. So there's been talk of this $300 billion fund and the U.S. has said it's not paying it. It's not clear who would pay it. And so will Iran receive some reparations essentially for the damage that's been done to it. Could it even be a Hormuz transit fee that pays for this over time?

So there's a few different scenarios here. Not expecting the U.S. to pay it directly. Maybe it will be that there are opportunities where China and other Middle Eastern partners see just genuine economic opportunities where they're investing in, and that is where this money eventually accrues over a long period of time. But again, the point being, there are some issues here.

We feel pretty good about it. We think at the end of the day, probably ships can continue to flow, but it's not quite a certainty here. There is a notable downside risk if they can't figure out these four big issues.

Okay. And so on from there. Let's talk central banks for a moment.

More hawkish Fed expectations: I've got the Fed (U.S. Federal Reserve) here. So again, we’re U.S.-heavy in terms of this deck.

The gold line was the expectation for the fed funds rate at the start of this year. So the fed funds rate was in the mid to high threes, where it still is today. And the thinking was you'd actually get some rate cuts through the summer and you would end up in in a low 3% kind of world.

And that's not really where we are right now. In fact, if you look at where expectations stand right now, again, we’re starting at a mid-to-high three kind of level. And the market is currently forecasting a couple of rate hikes over the span of the next year. And so it’s a real shift. Some of that is because energy prices rose.

Inflation is higher, which is valid. But of course, if this peace deal can hold, it becomes a less compelling argument to raise rates. And I should give away the ending, which is we have less hiking than the market is assuming right now, so we're not quite as fully sold.

Certainly, though, there is another reason where you could justify rate hikes, and it's just simply that the U.S. economy is pretty strong.

Unemployment seems to be stable. It's relatively low. We're getting some pretty good economic signals. You know, if inflation is too high and the economy is doing well, that is sort of the classic environment where you would consider doing some rate hiking. So it’s not wrong for markets to be thinking about rate increases. We're not sure there's a lot out there, but at a minimum rate cuts would seem to be off the table.

The extra twist is of course there's a new fed chair. Kevin Warsh is in. He's gone through his first meeting. He's done his first press conference. The expectation going in was he could be a bit dovish, wouldn't mind some rate cuts. That was kind of the wording as President Trump was choosing a new fed chair. And that wasn't really the message here.

He focused very much on inflation being too high. He made barely any comment about the labor market side of things. As a result, not to say that we're getting near-term rate hikes, but he doesn't seem to be pushing in the opposite direction as the market, or the opposite direction as the rest of the fed committee, at least not to an extreme degree.

And so perhaps he's trying to burnish his inflation-fighting credentials, and perhaps there'll be a pivot at some later date. But for the moment, he’s not coming in, throwing punches, trying to lower rates. So again, that fed funds rate is unchanged, with the scenario in which you get a little bit of hiking potentially over the next year.

Okay, on from there. Let's talk productivity.

U.S. productivity growth this cycle looks unremarkable, but is notably better than 2007-2019 norm: We've talked a lot about artificial intelligence. And this sort of is a conversation about artificial intelligence still. But in the context of we've been saying, first of all, we think AI is very important and for real, and we'll continue to advance, but in an economic context it will generate important productivity gains.

The question, though, has been: are we already getting those gains or is that a promise for the future and we'll check in a few years from now? And we've been saying we think we're getting some of those gains now. And so not to say there's definitive proof, but there is mounting evidence. And so this is probably one of the less compelling bits.

But just looking at the current productivity growth rate, that gold bar, 2.1% looks unimpressive in the context of the last 70 years. It looks pretty normal, not far from the long-term average. But I would say, more usefully, put it in the context of the norm, really from the global financial crisis through to the pandemic was materially less than that.

You can see a 1.5% average rate. So we have seen some productivity pick up. There is pretty good evidence, this is sort of econometric mathematical evidence that we are shifting productivity regimes. It may be a faster productivity regime that would make sense to us given the potential benefits from AI. I know there is debate as to whether this productivity pickup is AI or is other things.

Emerging correlation between industry AI adoption and excess productivity growth: You know the research that we've under undertaken. And let me go to the next slide here, looking at different sectors, the extent to which they are engaging with AI and the extent to which their productivity growth is faster than normal. And so it's not the most overwhelming pattern here, but I think you would agree, there's a slight bottom left to top right sort of directionality to these bubbles.

00:16:09:00 - 00:16:33:15

And so the bubbles further to the right tend to be higher. The bubbles further to the left tend to be lower. That is a hint that AI is perhaps driving some of this excess or additional productivity growth. And there's been some fairly formal research done by others on the subject, and it would seem that maybe two thirds of the extra productivity growth we're getting is from AI, and individual companies and sectors very much report enjoying some gains from AI.

It's hard to quite reconcile that with maybe the more muted actual productivity gains we're seeing, but they think they're getting some benefit. And so again, we are budgeting for a period of faster productivity growth. It's a very useful thing. Productivity growth can be a direct driver of earnings growth, if I wear my hat as a member of an investment firm.

And so that's quite helpful. It can, we hope, traditionally at least, help with wage growth. This one's a little bit more up in the air to the extent there's some labour displacement as well. So that's an incredibly important theme that we're watching very closely also. But ultimately it does look to us as though we are now in this faster productivity growth environment.

If anything, we think there continued to be some upside risks to that which is a welcome thing.

Let's talk through just some of the other economic forces of foot right now. I mentioned off the top that we are seeing pretty good bank lending growth. And so here's a chart on the eurozone on the left. It's a chart on the U.S. on the right.

Bank lending growth accelerating: What you'll notice in both cases is a fairly clear acceleration. So banks are lending more. And so both on the banks willing to lend side would suggest a degree of optimism from them. On the other side, and this is private sector lending, so lending to households and businesses, the fact that households and businesses are willing to borrow would suggest some optimism from them.

And just mechanically, there's more money sloshing around in the economy because the money is being sort of multiplied based on the limited reserves that banks are required to hold. So this is probably an economic support. I should say the UK sees a similar trend. Japan sees a similar trend. We're not right now seeing that same trend in Canada or China, or other markets we've spent some time looking at.

But ultimately it is happening in a number of places, and it wouldn't surprise me if it did happen in Canada, just because there are some real changes that would seem to encourage more lending and maybe less reserve holding by these banks going forward. So this is an economic support for the moment.

CapEx growth, not consumption, leads the way for U.S. economy: Another thing to think about is this is certainly an economy that is being driven, and this is the U.S. economy again, being driven disproportionately by CapEx growth, by these hyperscalers spending lots of money building data centres, building AI models and all of that sort of remarkable stuff.

And it's an extraordinary amount of money that they are spending, to the point that capital expenditure growth is significantly outpacing U.S. consumer spending growth. So that's what these blue bars show. Every time a blue bar is positive pointing upwards, that is the CapEx growth rate being faster than the consumer spending growth rate. So with really one notable exception, that has been the trend for a number of years, and it's certainly the trend in recent quarters.

So CapEx growth is the story. It's gotten so much attention. We've talked about it before. We've said – maybe with diminishing conviction now, given how extraordinary the growth rate has ended up being -- but we've been saying the risk is more CapEx, not less. That's been very true over the last year and this is an important driver of growth. We've estimated that economic growth in the U.S. was maybe half a percentage point faster than normal last year, thanks to this, maybe even three quarters of a percentage point faster than normal this year.

So a lot of portions of a percentage point for an economy that would only grow at maybe 2% or a bit more per year, that's a significant boost. And so we should care a lot about CapEx is certainly one conclusion. I do want to raise this next chart, though, just to say, let's not lose sight of the consumer.

But don’t ignore the U.S. consumer: The U.S. consumer is still really important. And so now we're breaking down into really contribution to the overall economy's growth. And so even though CapEx is growing faster than consumer spending growth, consumer spending is such a huge part of the economy that even relatively more muted spending growth is actually still a bigger driver of global U.S. GDP growth.

I hope I haven't confused you too much in that. The point is this consumer is so big. Even if they grow a little bit, that's still more important to the economy than CapEx growth growing a lot. So the blue bars are bigger than the gold bars. So we do still need to care about the U.S. consumer, even though we're getting kind of some free extra growth out of CapEx.

U.S. consumer has challenges, but not completely down for the count: And so let's just do a quick and I will admit, overly wordy review of the U.S. consumer’s situation right now. And so two obvious bits of bad news here. One is high energy prices eroding income, eating into income, though to a lesser extent going forward, of course, as we see oil falling, which is welcome. But that has been a challenge.

And the other one is just this is a period of very low population growth in the U.S. And that you think about consumer spending growth. It kind of comes from the average person getting more money, but it also comes from just more average persons. And so we're not getting as much of the latter. So low population growth is a governor, is a restrictor on overall spending growth.

So we need to acknowledge that. And of course, if you're a business just geared to the number of customers who might buy a cell phone plan or something, well, it's very relevant that the population growth is slower. That might be a problem for you. But overall, actually, the consumer spending picture isn't as bad as you would think based on those two problems.

And so one has been actually, the U.S. economy is generating more hiring than you would think. Modeling would say you should get maybe 30–50,000 new jobs a month based on the current population growth rate. It's actually running at above 100,000 a month. And so you are getting more workers who can spend money, which is welcome.

Wage growth matters. Obviously, the individual worker is getting decent looking wage growth right now. And so that's helping to some extent. We're seeing the household savings rate fall. Now I don't celebrate that. Obviously it's nice when households are saving and accumulating wealth and so on, but it is falling, which just mechanically means that their consumption growth is rising faster than their income growth.

So they're willing to save a bit less or in some cases to borrow a bit more to finance that consumption. Check in in a year or two, I wouldn't want that to be a forever trend, but for now, it's enabling faster consumption growth than income growth. And it's not completely inappropriate, by the way, because an aging population should save less.

You've got people retiring who should become dis-savers. They should be tapping into the retirement accounts. Similarly, we've seen the stock market go up so much that people don't need to save as much if their wealth is rising at a happy rate, even without adding additional savings to it. So that's helping. Tax cuts, of course, from last year are helping this year and those remain in place.

And so that's welcome as well. I mentioned the equity wealth effect. But it's actually arguably doubly powerful right now. One is it just the stock market's been going up so incredibly, at least up until the last month or so, that people who are a lot richer will spend part of that money. The other is – and this is partially a function of saving -- but also stock market increases.

If you look at overall American stock market-holding households relative to 2019, they hold twice as many stocks now, in value, as they did then. Every percentage point increase in the stock market is actually more helpful for consumption than it was back then by two-fold. So that's helpful, you know. Oil is hurting but hurting less than in the past because oil is less central to the economy or even to the average person spending basket than it was in the past.

Cars are more fuel efficient, the service sector is bigger versus the goods sector and so on. We don't see a lot of distress. And so household loan delinquency rates are broadly falling, not rising. And so of course some households are stressed and there is a certain K shape to the economy and lower income households not doing as well.

But you know, you would think you'd be picking up the greatest distress, perhaps, among those low-income households in terms of loan delinquency rates, and not looking all that concerning, which is welcome. Also, consumer confidence numbers are weak, this may sound very convenient, but I'm inclined to disregard that those have proven to be such atrocious predictors of actual behavior that it just doesn't mean a lot to me at this point in time.

And then the fact that gas prices are high, at least have been, not something to celebrate, certainly, but ultimately requiring people to spend more. That's a non-discretionary item you kind of do need to get around. And so that is actually causing people to spend a bit more. Not a good reason, but a reason nevertheless.

Not a Canadian recession, in our view: And so turning to Canada for a moment, nodding our head in that direction. Let's look at Canadian GDP by quarter, unusually though measured in three different ways. And so we're not just looking at the standard expenditure-based GDP growth, which by the way was negative in the first quarter was also negative in the fourth quarter of last year.

Got some tongues wagging about recession and so on. We don't think it was one the decline was too slight and so on. Strengthening that argument, though, actually two of the three ways of measuring Canadian GDP were positive in the first quarter. Only one was actually negative. And when we broaden the analysis out and we look at the labour market, it's actually held together in 2026.

And we look at GDP per capita. It's held together too.

Mega-cap stocks recently underperform; but strength elsewhere: And so turning to financial markets now, let's acknowledge that we have seen some notable choppiness in the stock market performance. I find that chart on the left here particularly notable. So the fact that we had been seeing rather a declining trend over the last few years really means that the big stocks were the ones that were doing the outperforming.

And so an equal-weighted index was doing notably worse than a market cap-weighted one, which of course then heavily weights towards these hyperscaler-type companies. So the average stock has underperformed the market because those top few stocks were doing so remarkably well. I wouldn't say there's a smoking gun here by any means, but if you look over the last few months or even the last six months to a year, you will notice that blue line stabilizing to some extent, or at least no longer regularly declining.

And so there is now a new debate for the hyperscalers: is it now a time for other stocks to perform? And I would say we have some sympathy to that but not denying the great importance of artificial intelligence at the same time. You can kind of get a similar picture on the chart on the right here, by the way.

The blue line in this case is the largest S&P companies. And so you can see how those have outperformed the overall S&P 500 notably over the span of the last 7 or 8 years. However the index is the small cap index, the mid-cap index, which of course have underperformed the gold and the blue lines at the bottom, starting to bottom out recently, and indeed starting to rise at a time when the dark blue line is maybe starting to fall a little bit.

And so we are starting, that is to say, to get some outperformance out of the smaller companies, if that makes sense. And so it does speak to some value in having a diversified portfolio in part. And again, it raises some questions as to what will drive the market going forward. I would say in theory, if we're indeed seeing a sustained broadening of the market and we're starting to see some non-tech giant companies begin to perform here, historically, that's been a good thing.

And that has been maybe room for a new leg for the stock market to rise, in this case in a broader way, with perhaps a bit less participation by some of the previous leaders. So I wouldn't say it's bad news overall, but it is something of a changing of the guard and we'll see whether it sticks obviously. I want to acknowledge an important debate for investors in the stock market or just for investors deciding where they want their money to go.

And so there's bad news and there's good news here. So the bad news is that valuation column, which at least according to quite a range of stock market valuation estimates that we calculate would say, universally, though very much to varying degrees, that major stock markets are overvalued. The S&P 59%, the TSX, 21% and the UK, just 1%, so much smaller.

But to varying degrees more expensive than the historically normal valuation. Now I will push back a little bit and say these valuations are simplistic and they fail to appreciate certain things. For instance, if earnings growth is fast, an expensive stock today might not be that expensive once the earnings base has increased over the next year or two – which, as I'll get to in a moment, is, as it happens, the expectation.

Similarly, the composition of the stock market can change over time. Focusing on the S&P 500, which is seemingly the most overvalued, it's become more and more a tech index and lots of big tech companies at the start. Tech companies have always been valued more highly than a utility or something like that. And so as we see a shift towards more tech companies and the utility sector, perhaps, as an example, a smaller share of the total, we should have higher valuations.

It's not to say it's overvalued to the extent that it looks. So I think we're a bit skeptical that things are as overvalued as those numbers suggest, but you can certainly say valuations are somewhat challenging. You do need some things to go right in earnings to justify them is perhaps the way to think about that. The good news is, and this is the other half of the story or the tug of war on the earnings side.

The debate: stock market valuations versus earnings momentum: And so we've got 2026 earnings estimates and 2027 estimates. This isn't actually the numerical estimate. This isn't even the growth rate expected from 2025–26 or from 26–27. This is just actually how those estimates have changed over the last week, which is a very arguably foolishly short time frame. Over the last three months and over the last six months.

The versus median is almost to fool you here. It's really just to say, actually, normally the consensus estimate goes down a little bit. And so we've just adjusted for that. But functionally doesn't change it by much. Functionally, the point would be we've seen big upgrades to earnings estimates for 2026 over the last three months, over the last six months. We've seen pretty big earnings estimates upgrades for 2027 over those time frames as well. A little murkier over the last week.

You've got a couple negatives. We're watching it. It had been so universally positive, notable. Suddenly they're not. But equally, -0.2 is not exactly blowing our mind here. And we'd like to see the trend play out over a longer period of time. But again, the point being, for the moment, earnings are the reason the stock market is still happy and willing to pay a premium because they just keep going up and up.

And so for the moment, we're assuming that can continue, but we're watching to see whether any of the recent momentum, the constant upward revisions start to be challenged. And for the moment, it's clear that that change is happening right now.

RBC GAM Macro Barometer still gives positive signal for U.S. risk assets: And then lastly, and not to suggest this is the only thing one should invest off of.

In fact, it's certainly just one of many, many inputs that we consider. But I just wanted to share some work that a colleague does on this. This is our RBC GAM Macro Barometer. It attempts to factor in variety of fundamental forces and to reach some sort of overall risk asset investment conclusion.

And so as you can see in terms of those categories in the column on the left, it includes some economic thoughts and includes some credit thoughts and some stock market sentiment and valuations and so on.

And so to give you the main conclusion at the bottom left, the overall barometer is actually strongly positive. It would say now it would appear still to be a pretty good time to be invested in risk assets, be it stock market or be it credit or some other things. It's not universal. You can see you've got, I guess, four strong positives and two slight positives and some neutrals and even some negatives.

This is just kind of the way of the world. And you always have some negatives. And you'll notice the two negatives, by the way, in that first colourful column. So one is S&P 500 valuations. We just talked about how it is an expensive market. So that's viewed negatively. Of course the other is sentiment. And so this is one of these switcheroos in which the sentiment is so positive,

people are so enthused about the stock market right now, that's a bit of a concerning sign. You'd actually rather people be pessimistic. That's the classic time to buy, as opposed to when people are really excited. You want to go kind of opposite to the sentiment that's out there. And so those are the two challenges. But you do have just a pretty good economic backdrop, to kind of summarize some of these other variables, and quite good earnings and so on.

You'll notice the one month change a little bit of deterioration here or there. So we're kind of watching a bit. But over three months, over six months, some quite a bit of green I guess is the way to put it. And so for the moment, this would suggest it’s still a time that you should be invested. We are, for what it's worth, still a little bit overweight equities not a lot, but a little bit overweight and still comfortable enough with that.

We're certainly aware that there's some chop in markets and we need to pay close attention right now. But for the moment the macro environment seems sufficiently supportive.

And with that maybe I'll just say thank you very much. And as always, if you want more of this sort of analysis, visit our website, rbcgam.com/insights or check out the commentary we publish regularly on LinkedIn.

In particular, you can use that QR code as well, if you like. And so again, thank you so much for your time. I wish you well with your investing and please tune in again next month.