Jimmy Jean, chief economist Desjardins, outside their offices in Montreal.Christinne Muschi/Christinne Muschi/The Globe and
Major Canadian and U.S. stock markets closed out the third quarter at or near record highs.
The bull market may be due for a pause, but it is not over, according to Desjardins’ chief economist and strategist Jimmy Jean. He argues that high valuations, rising geopolitical tensions and U.S. election uncertainty may lead to a near-term pause in market momentum. However, he is calling for fresh new highs for the TSX Composite Index and S&P 500 in 2025.
The Globe and Mail recently spoke with Mr. Jean for a two-part interview. Part one, featured below, focuses on his outlook for equity markets, as well as his sector and asset mix calls. In part two of this interview that will be published later this week, Mr. Jean shares his perspectives on interest rates, the economy, the housing market and the Canadian dollar.
Jimmy Jean, chief economist Desjardins argues that high valuations, rising geopolitical tensions and U.S. election uncertainty may lead to a near-term pause in market momentum.Christinne Muschi/Christinne Muschi/The Globe and
Your 2024 year-end target for the TSX is 24,000. Based on that, you don’t believe we’ll get a year-end rally, which is counter to historical trends. Why is that?
I think the market has priced in a lot of good news and that’s the same in the U.S.
We’re still in a situation of high valuations and uncertainties about the shape of the economic cycle. We think that those concerns, and also given the tensions around the Middle East and the U.S. election, will probably cause some volatility going forward. That’s why we’re cautious as to the prospects until the end of the year.
The S&P/TSX Composite Index is on track to post a double-digit return this year. For 2025, you have a year-end target of 25,200, implying an annual price return of just 5 per cent. Why the lower return expectations for next year when interest rates are falling, thereby stimulating economic activity, and you expect economic growth to strengthen with your 2025 forecast for real GDP growth of 1.8 per cent? It seems to be a positive backdrop for the stock market.
Yes, it is. But again, I think a lot of that has been brought forward and integrated in this year’s performance. Mind you, in the context of very high valuations, a 5 per cent gain, and a total return of maybe 8.5 per cent, it’s pretty decent after two strong years for the TSX. But, we’re wary of very high valuations.
We have growth strengthening in 2025, you’re right, but at the same time, growth could be stronger in Canada but it’s going to be held back by the demographic shifts so we’re mindful of that as well.
With respect to demographic shifts, you mean lower population growth?
Yes, that’s right.
Why do you have an even lower expected return for the U.S. market, just 3.5 per cent for the S&P 500 next year with a year-end target of 5,850? The S&P 500 has a greater technology sector weighting compared to Canada, an area with strong earnings growth, plus your 2025 real GDP forecast of 2 per cent is higher compared to 1.8 per cent for Canada.
It’s not so much the economy, you’re right, the economy is still holding. We just think that there’s less room for improvement from the current record levels.
I think there’s been a lot of inflated anticipations as to the returns and the prospects in the very near term for technology stocks. I’m not saying that AI is not a good medium to long-term play, but there’s been so much expectation, and we know there’s a lot of regulation coming as seen with ongoing legislative efforts in places like Europe or here in Canada. So, given those extreme valuations, we have a cautious stance.
What do you think will be the next catalyst for the stock market?
Definitely, the big thing will be the U.S. election.
I’m not sure the market has a firm view on who will win at this point. But, if we get a second term for Trump, I think the market could have a much stronger corporate profitability profile in 2025 in the U.S., and to some extent, maybe a little bit of spill over to Canada. Trump is pro deregulation and also has this agenda of tax cuts for companies, very significant tax cuts. So, that would certainly fuel the stock market.
If Harris wins and she has a divided Congress, I think it would be pretty much steady as she goes. I’m not sure that markets would respond too much to that.
So, it seems to me that the risk from the election is neutral to upside.
Focusing on the Canadian stock market, what sectors do you believe have the strongest fundamentals and tailwinds in 2025?
I tend to like, and it might be a little bit of a contrarian play given the performance this year, consumer discretionary in Canada as it hasn’t performed as well as other sectors. But, looking into 2025, we have rate relief, that’s certainly going to help. And Canadians have so much savings accumulated that they can spend. Also, we’ve been impressed by real disposable income growth, inflation adjusted disposable income is pretty strong. Provided that this continues, I think we’re going to see consumers start to spend again and that could benefit that sector.
Would that spending reinflate inflation?
No. I don’t think we’re looking at something massive that’s super inflationary at this point because there’s a lot of slack in the economy.
With the yield curve expected to normalize in 2025 and economic growth expected to improve, this should be positive for bank stocks. What are your expectations?
Financials have had a pretty good run so I would be neutral at this point in time. I think financials have integrated a lot of the positive news – the un-inverting yield curve and soft landing - that’s embedded now.
China has recently announced stimulus measures, do you believe the narrative has changed on China?
I think it’s probably the most convincing we’ve seen so far but we are still going to wait to see how that plays out. The problems in China are multidimensional.
The price of gold keeps climbing to new record highs. Based on your 2025 year-end target of U.S. $1,900 per ounce for the price of gold, my assumption is that you think it has peaked or it will soon peak. Can you elaborate on your forecast?
We’ve seen quite the run and it’s been driven by increasing central bank demand from countries like China and India looking to reduce their reliance on the U.S. dollar. There’s geopolitics at play as well.
For the time being, we’ve seen gold being less correlated with inflation. But we think those fundamentals will eventually reassert themselves. The latest U.S. CPI reading is 2.5 per cent, on an annual basis, and we have it continuing to move lower in the future. Inflation hedge properties of gold, that part will be less attractive in our view. That’s why we have it fading a little bit. We think that there’s been a lot of speculation added to those drivers that will probably soften as well.
Small cap stocks benefit from a falling interest rate environment as many companies have floating rate debt. Meanwhile, large cap stocks may offer investors lower volatility, many are profitable and have dividend income as a result. Over the next year, what do you believe will outperform - small-cap or large-cap stocks?
I tend to like large caps a little bit more.
Right now, there’s a lot of savings, especially in Canada. As interest rates fall and returns become less attractive, investors are going to be looking for higher returns. I think quality, dividend paying large-cap stocks are going to be appealing, especially in a lower rate environment, and also to diversify portfolios.
There are still some lingering questions about this cycle, ‘Is it really a soft landing?’ or ‘Could there be a recession?’, I tend to prefer quality in that situation.