The Unique Perspective of Lori Calvasina


Lori Calvasina, head of U.S. equity strategy at RBC Capital Markets, possesses a remarkable ability to merge quantitative analysis with storytelling in the world of investing. She understands that it takes more than just building intricate models to make successful investment decisions. Taking into account historical context, political factors, and market sentiment are crucial elements that can determine the success or failure of an investment thesis.

Having started her career in government and foreign affairs before spending two decades in equity strategy at prestigious institutions such as Citi, Credit Suisse, and now RBC, Calvasina has witnessed various market cycles—from the dot-com boom and bust to the financial crisis, and most recently, the Covid-19 crash and subsequent bull market. Her expert analysis leads her to predict a 4,250-point price target for the S&P 500 by the end of 2023, representing a 4.5% decline from the index’s current level. It’s important to note that the benchmark index has already risen approximately 16% year-to-date.

In a recent interview with ‘s, Calvasina shared her insights on what lies ahead for the market in the second half of the year. She explains why this particular time may differ from others and highlights key aspects that investors may be overlooking. Find below an edited version of their conversation.

Examining the Parallels with 1945

’s: You’ve compared the current market and economic backdrop to 1945, another postcrisis period that saw big changes in the economy and the degree of government support. What does that comparison reveal?

Lori Calvasina: Typically, the stock market never hits its bottom before a recession sets in. This suggests that there might be another significant downturn on the horizon that will push the market below the lows we experienced in October 2022. However, there is one historical exception where the market continued to rise throughout a recession.

Historians often describe the 1945 recession as a technical recession caused by the transition from a wartime economy to a peacetime economy. During this transition, there was a substantial decrease in government spending. We can draw parallels to the present situation: the Covid-19 economy mimicked a wartime economy, and now we are witnessing the withdrawal of much of the fiscal and monetary support.

By analyzing these historical patterns and drawing parallels, Calvasina offers valuable insights into the current market landscape. Her unique perspective exemplifies the importance of considering broader factors beyond mere numbers and models in making informed investment decisions.

The Economic Parallel: Past and Present


A Strong Foundation

During the mentioned period, both consumption and private investment flourished, creating a formidable economic force. However, this prosperity coexisted with an intense inflationary backdrop. In 1944, inflation rapidly escalated, cooling off briefly in 1945 before resuming its acceleration throughout 1946. At the same time, the unemployment rate experienced a gradual increase, peaking at approximately 4%. This rise was partially fueled by returning soldiers, causing some displacement within the civilian workforce. It should be noted that interest rates remained relatively low and stable, distinguishing this era from our present circumstances.

Weathering the Storm

Interestingly, despite a technical recession occurring between February and October 1945, the market appeared unfazed. The recession was perceived as a consequence of the withdrawal of support rather than an indication of a weakened underlying economy. Essentially, the market disregarded this temporary setback, reflecting its confidence in the overall health of the economy.

The Impact of World War II

Historians often attribute the revitalization of the economy during this period to World War II. The war acted as a catalyst for pulling the nation out of its decade-long Great Depression slump, leaving behind a lasting economic legacy characterized by restoration and renewed growth.

Drawing Parallels with Recent Times

While our economy between the 2008-09 financial crisis and the ongoing Covid-19 pandemic didn’t resemble the Great Depression, it consistently operated below its full potential. Low inflation, low interest rates, and sluggish economic growth became the norm. These circumstances contributed to the formation of a growth stocks bubble, as individuals eagerly pursued opportunities in sectors promising sustainable growth. This trend emerged due to a general perception that the underlying economy lacked excitement and dynamism.

The Restorative Potential of Covid-19

Given the numerous similarities between the past and our present situation, it begs the question: Can the shock to the economy caused by Covid-19 also serve as a restorative force? While the answer may not present itself immediately, parallels can be drawn. One such parallel is the possibility of reindustrialization, specifically the reshoring of industries within America. The substantial influx of capital into the domestic economy has the potential to rebalance our labor market and cultivate a more vibrant and dynamic economic landscape.

In conclusion, by examining historical events and their effects on the economy, we can glean valuable insights into our current circumstances. The similarities between the economic climate of the mid-1940s and the challenges we face today provide us with hope for a prosperous and restored future.

The Changing Landscape of Globalization and the Stock Market Outlook in 2022

Even before the Covid-19 pandemic, people were starting to question the benefits of globalization. The supply-chain crisis during the pandemic only added fuel to the debate, highlighting the need to invest more in our own countries. As we navigate through the uncertainties of the market, it’s essential to delve into the insights provided by experts.

Forecasting the S&P 500 Price Target for 2022

One expert, who recently adjusted their year-end S&P 500 price target, sheds light on the factors influencing their forecast. Their analysis involves several models that consider the economy, valuations, earnings, sentiment, and various other factors.

The most conservative model assumes zero growth in gross domestic product for 2023, aligning with the consensus forecast. With this model, they arrive at a projected S&P 500 level of around 3,800 points.

On the other hand, the most optimistic model takes into account the expectation of moderate inflation and stabilized interest rates. If these conditions persist, the S&P 500 could reach a multiple of 21.8 times trailing 12-month earnings, translating to a target price of 4,650.

By averaging all six models, they arrive at a projected S&P 500 level of approximately 4,250 points.

Market Evaluation and Expectations

The current trading rate of the S&P 500 stands at 4,450 points, with a trailing earnings multiple of 22. This prompts the question of whether adjustments to the forecast are necessary or if a market decline is expected later this year.

Their base case scenario suggests that the S&P 500 will reach 4,250 points by the end of the year. This projection indicates an impressive 11% rise for the year, driven by progress in combatting inflation and peaking interest rates. However, it also implies a decrease of about 4.5% from the current market level. Stocks appear relatively expensive when compared to bond yields, and the consensus forecast for economic growth remains pessimistic. It’s worth noting that investor sentiment has improved from its earlier extreme bearishness but is now at more neutral levels.

Identifying the Biggest Risk to the Stock Market

One crucial consideration is the potential risk facing the stock market. Currently, the market seems to be factoring in a short and shallow recession, primarily playing out in 2023 or perhaps the first quarter of 2024. However, if the recession proves to be deeper and more prolonged, extending into the later part of next year, it could pose significant challenges for the stock market.

Being aware of these potential risks and evaluating expert insights enables investors to navigate the stock market terrain strategically. By striking a balance between these perspectives and individual financial goals, investors can make informed decisions to optimize their investment portfolios.

The Impact of Inflation on the Market

A lot hinges on the trajectory of inflation and how it influences the Federal Reserve’s actions. Although the consensus forecast suggests that inflation will return to approximately 2% by the end of 2024, I remain cautiously optimistic about this projection. However, it’s important to note that the market doesn’t concern itself with individual opinions, such as what Lori Calvasina predicts regarding the consumer price index. Instead, market trends and collective wisdom hold more significance. Should inflation decrease while the anticipated recovery in 2024 materializes, the current market trading levels would appear more reasonable.

Assessing the Market’s Narrow Breadth in 2023

Have you taken notice of the market’s limited breadth in 2023? If we exclude seven or eight megacap technology stocks, it becomes evident that the market has largely remained flat this year.

While it’s logical to worry about a few dominant stocks driving the market, and the potential risks associated with them, it is worth mentioning that I have not come across any models suggesting that a narrow market necessitates a sell-off. Predictive capabilities in this regard are limited.

“I prefer old-economy technology companies, namely software and semiconductor firms, rather than internet-based companies. Valuations are more attractive.”

— Lori Calvasina

Looking ahead, there are two possible scenarios: either something goes awry with these leading companies and leads to a market decline, or the market’s leadership expands to include a broader range of sectors. At this point, it is difficult to determine which path is more likely.

Upon reviewing historical instances of increased market concentration, we discovered that the outcomes following such episodes are fairly evenly distributed. A narrow market tends to arise when people feel anxious. It is a symptom of negativity and individuals gravitating towards investments they are familiar with, but it doesn’t serve as a reliable predictor.

Sector Recommendations

We advise maintaining a balanced portfolio, incorporating defensive stocks, value stocks, and growth stocks. Although we anticipate a shift away from technology in terms of market leadership, it’s important to consider that economic growth is expected to be sluggish. In such an environment, growth stocks often perform well.

Selective Growth Exposure

To navigate the dynamic world of investing, it is crucial for investors to be highly selective in their growth exposure. As a professional copywriter, I strongly favor old-economy technology, particularly software and semiconductor companies. Valuations in this sector are much more appealing when compared to their internet counterparts.

Furthermore, I find energy stocks to be quite attractive. Not only do they boast a high dividend yield relative to other sectors and historical data, but energy companies are also actively buying back stock. This commitment to stock buybacks remains strong, as indicated by earnings-call transcripts. Conversely, we are seeing a decline in financial companies’ enthusiasm for buybacks, highlighting an interesting contrast. Despite negative earnings revisions in the energy sector, the situation is gradually improving.

For investors seeking a defensive position, healthcare is the sector to watch closely. Compared to utilities and staples, which are relatively expensive, healthcare is experiencing a positive and widespread improvement in earnings-revision trends. Our models indicate that the healthcare sector appears quite attractive.

Sectors to Avoid

Among large-cap stocks, I would advise investors to steer clear of consumer discretionary companies. This sector is currently overpriced, as the projected 2024 recovery is already factored into the stock prices. If this recovery falls short of expectations or if we face a more severe economic downturn in the latter part of this year, consumer discretionary stocks will prove to be expensive. The risk-reward ratio is not in favor of investors.

However, if one still desires exposure to a consumer-rebound trade, I recommend looking into small-cap consumer discretionary stocks. This sector offers more favorable valuations in comparison to its large-cap counterparts. Historically, small-cap consumer discretionary stocks have exhibited strong outperformance during economic recoveries.

The Bullish Case for Small-Caps

Small-capitalization stocks, commonly referred to as small-caps, have been largely overlooked in the market and are currently undervalued. While small-caps are often associated with troubled regional banks, their cheapness extends to nearly every sector, excluding defensive industries such as utilities.

During market downturns, the Russell 2000, a widely followed small-cap index, typically witnesses its forward price-to-earnings ratio hit a low of 11 to 13 times. Last summer, it reached this low point at 11 times but has since recovered slightly to approximately 15 times. However, even with this rebound, the ratio remains below average and at the lower end of its historical range. Notably, the index’s valuation peak in 2021 reached almost 20 times forward earnings.

To truly capitalize on small-caps, the market must regain confidence in an economic recovery by 2024. Unlike their larger counterparts, small-cap companies primarily focus on domestic operations. Consequently, they have borne the brunt of shifting investor sentiment surrounding the prospects of a 2024 rebound.

While the Chinese recovery falls short of expectations, this domestic focus could act as a strength. It underpins the relative strength of American growth and reinforces the long-term themes of reshoring and reindustrialization. Therefore, investing in domestically focused companies holds promising potential for reinvigorating the US economy.

Thank you for sharing your insights, Lori.

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