Daily roundup of research and analysis from The Globe and Mail’s market strategist Scott Barlow
Domestic stocks outperformed the S&P 500 by a significant margin during the third quarter and BMO chief investment officer Brian Belski took a victory lap in his monthly Canadian chartbook report,
“We adjusted our S&P/TSX price target by 4% to 25,500 from 24,500 to reflect steadily improving earnings confidence and associated valuation expansion. While the S&P/TSX frankly exhibited skeptical earnings trends and sluggish price performance for most of the first half of the year, the index snapped out of its malaise in style. The TSX gained a solid 9.7% in the third quarter, outpacing the S&P 500 by over 4%, marking the strongest outperformance for Canada since the first quarter of 2022. Yes, the Canadian catch-up trade we have been calling for since the start of the year has finally arrived, and we believe will likely persist well into 2025. As such, we raised our 2024 year-end price target to reflect the key tailwinds of returning equity flows, broadening equity performance, and the clearly improving earnings environment in Canada. We did not increase our 2024 EPS target, given the bottoming of revision trends are more supportive of 2025 EPS. As such, our 2024 implied P/E ratio increased to 17.0x from 16.3x, which is now just in line with the long-term average multiple … our work shows that despite revitalized outperformance, there remains significant breadth of absolute and relative value in Canada”
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A special report from BMO economists highlight the potential risks for Canada arising from the new U.S. president,
“Canada’s economy might benefit initially from stronger U.S. growth, as its largest trading partner buys three-quarters of its merchandise exports. Energy producers would also rejoice if the Keystone XL pipeline was resurrected. However, the country could be one of the hardest hit (along with China and Mexico) from a possible trade tussle. Increased uncertainty about tariffs and the fate of the USMCA ahead of the 2026 review could depress capital flows to Canada and weaken domestic investment, likely extending the nation’s productivity slump. Suffice it to say, none of this is good for the Canadian dollar, which is already challenged by faster rising unit labour costs relative to the U.S. … The BoC slashed policy rates 50 bps in October, but a more cautious path of 25 bp moves over the coming months is more sensible given the post[1]election uncertainty and heightened risk to the Canadian dollar. The federal government might need to adjust corporate tax rates to prevent investment from migrating south. Canada will also be pushed harder to raise its NATO contribution much faster than currently planned, potentially leading to a higher budget deficit. Moreover, Trump’s pledge to deport undocumented immigrants could impede the Canadian government’s goal of slowing population growth if migrant flows increase across the U.S.-Canada border
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RBC Capital Markets head of U.S. equity strategy Lori Calvasina sees market advantages from a Trump presidency but also an important headwind,
“First, while both a Republican sweep and Republican White House win with a split Congress have historically been good for the stock market, average annual S&P 500 returns have been much higher, on average following a sweep (13% vs. 5%). Second, the most important difference that we see between the two scenarios from a policy/equity market perspective to us is tax, with Trump’s ability to get his tax plans through seemingly easier with a sweep than a split … modestly bullish bias in a Republican sweep due to his approach to regulation and taxes, driven by optimism on the Energy and Financials sectors. We also pointed to the likelihood that global investors would see Trump’s victory as a reason to overweight US equities … We pointed out that investors have been concerned about Trump’s approach to tariffs and their potential inflationary impacts and the deficit, and noted that equity valuations seem likely to eventually take a hit if 10-year yields rise too much more. In the past, we’ve also highlighted how US equities can usually weather moves higher in 10-year yields of less than 250 basis points, but that sizable moves bigger than that can often trip up the stock market”
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Diversion: “Why do our brains love concerts so much? Let’s ask neuroscientists” – A Journal of Musical Things