Canada’s main stock index will take a breather for the rest of this year but is set to notch record highs as metal prices climb and expected lower borrowing costs bolster the outlook for the domestic economy, a Reuters poll found.
The TSX has added 7.2 per cent since the start of the year, moving above its previous record closing high set in March of 2022 to end at 22,468.16 on Tuesday.
“We anticipate the stock market to continue its upward momentum into the summer and beyond, driven by robust earnings and interest-rate cuts on the horizon,” said Brandon Michael, senior investment analyst at ABC Funds.
Investors have raised bets on the Bank of Canada beginning an easing cycle with its next policy announcement on June 5 after data on Tuesday showed the annual rate of inflation falling to a three-year low of 2.7 per cent.
The median prediction of 21 portfolio managers and strategists in the May 13-22 poll was for the S&P/TSX Composite Index to advance just 0.1 per cent to 22,500 by the end of 2024, but that is higher than the 21,750 expected in February’s poll.
It is then expected to soar to 24,300 by the end of 2025, a gain of 8.2 per cent.
“As we go into 2025, markets will look forward to the positive impact of falling interest rates on the Canadian economy and global economy,” said Macan Nia, co-chief investment strategist at Manulife Investment Management.
A recovery in the domestic economy would help bank stocks, while a pickup in global economic activity would be a boost to resource shares, Mr. Nia added.
Canada’s big six banks are expected to set aside more money for bad loans when they begin reporting quarterly earnings on Thursday.
The financials sector, which includes banks, accounts for 29 per cent of the Toronto market’s weighting, while the energy and materials sectors account for a combined 33 per cent.
The materials sector includes fertilizer and metal mining companies. Gold XAU= and copper HGc1 have climbed in recent days to record highs.
“General gains in the global economy have translated into base-metal price gains. We see this continuing to benefit the Canadian stock market,” said Philip Petursson, chief investment strategist at IG Wealth Management.
Eight of 13 analysts who answered a separate question said a correction of 10 per cent or more is unlikely or highly unlikely over the coming three months.
“The data would show strong momentum follows strong momentum. While a correction is always a possibility, it is no more a possibility today than in other periods,” Mr. Petursson said.
Meanwhile, the Standard & Poor’s 500 will end the year near current levels, but strong stock-market gains so far in 2024 have some strategists saying the index is at risk of a correction in coming months, according to a separate Reuters poll released Wednesday.
By year-end, the benchmark index will be at 5,302, according to the median forecast of 50 strategists polled May 13-22. That is slightly below Tuesday’s close of 5,321.41.
That latest prediction is still above the 5,100 year-end level forecast in a Reuters poll in February.
The S&P 500 has gained more than 11 per cent so far this year and all three major U.S. stock indexes have risen to records recently, thanks in part to economic data that has eased inflation concerns, fuelling bets that the U.S. Federal Reserve will start cutting interest rates later in the year.
While Federal Reserve officials have hinted U.S. interest rates may not fall any time soon, many investors still expect the Fed will be able to cut rates twice this year.
Strategists who answered an additional question were almost evenly split on whether a correction was likely in U.S. stocks over the next three months. Eight of 15 respondents said a correction was unlikely, while seven said it was likely.
“Most of the gains have already been gotten,” said Robert Pavlik, senior portfolio manager at Dakota Wealth in Fairfield, Conn., who still sees the S&P 500 climbing a bit further to end the year at 5,575.
With the Fed, he said, “my sense is they don’t let us down, meaning they cut rates” this year.
Projections for strong earnings are a positive. Analysts expect overall S&P 500 earnings to rise 10.4 per cent in 2024, LSEG data showed.
But stocks are also at high valuation levels. The S&P 500 trades at a forward price-to-earnings ratio – a commonly used metric to value stocks – of 20.9, well above the index’s historic average of 15.7, according to LSEG Datastream.
Evercore ISI, which has a 4,750 year-end forecast for the S&P 500, expects U.S. earnings estimates to weaken.
“Given the slowing in the economy – and it’s not rampant slowing but noticeable – it creates a greater probability that earnings estimates are just too optimistic,” said Julian Emanuel, Evercore ISI’s senior managing director for equity, derivatives and quantitative strategy.
He added: “It wouldn’t be an issue if it wasn’t for the fact that valuations are where they are.”
Investors are keen to see whether the market can sustain its gains tied to optimism over artificial-intelligence developments.
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