The forecast for Canadian equities is brightening so quickly that it’s making me uncomfortable. As legendary Merrill Lynch strategist Bob Farrell was fond of saying, “When all the experts and forecasts agree — something else is going to happen.” Or maybe my skepticism is just typically Canadian.
BMO chief investment strategist Brian Belski spent much of 2023 chiding domestic investors for being overly pessimistic about their equity market. His confidence that the TSX would soon play catch-up with the surging S&P 500 took another step in a Tuesday research report when he suggested that the Bank of Canada rate cut would act as a ‘catapult’ for domestic stocks.
At BofA Securities, equity and quant strategist Ohsung Kwon reported that a preliminary update of his proprietary Canada Cycle Indicator (CCI) indicated the sixth straight month of improvement. The May recovery resulted from widening bond yield differentials versus the U.S., commodity prices and a better earnings revision ratio – more upwards moving profit forecasts than downwards. Inflation and leading economic indicators are the other two data sets used in the CCI methodology.
Mr. Kwon also notes that the economic growth differential relative to the U.S. is closing from record levels and TSX 60 earnings growth is now positive in year over year terms for the first time in 12 months.
BofA’s CCI, which uses three month rolling average data is now close to positive territory at -0.18. The preliminary one-month result is above zero which is important. When the three-month CCI is positive, the TSX has outperformed the S&P 500 by an average 4.2 percentage points over the next 12 months.
Furthermore, Citi strategist Hong Li has detected the early signs of U.S. stock price momentum moving away from growth stocks – the megacap technology stocks that dominate the benchmark among them – and moving towards value stocks. Slowing price momentum for growth companies like Nvidia Corp., Amazon.com, Salesforce Inc. and Advanced Micro Devices for instance would make it very difficult for the S&P 500 rally to continue.
Over the past five years, the S&P 500 generated a total return of 107.7 per cent in Canadian dollar terms, almost doubling the S&P/TSX Composite’s 58.9 per cent. At some point, a degree of reversion to the mean has to happen and domestic stocks outperform. The recent data do seem promising, enough that the process of writing this did a lot to allay my cynicism, and strongly consider more domestic equities.
-- Scott Barlow, Globe and Mail market strategist
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Stocks to ponder
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The Rundown
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Compiled by Globe Investor Staff