Daily roundup of research and analysis from The Globe and Mail’s market strategist Scott Barlow
RBC Capital Markets analyst Darko Mihelic has lowered his profit estimates for the Canadian banks,
“The large Canadian banks start reporting Q3/23 results on August 24, and our core EPS estimates for the quarter decrease approximately 7 per cent on average. In the quarter, we expect capital markets revenues to be pressured, credit losses to continue to normalize, and the average core all-bank NIM [net interest margin] to slightly expand quarter-over-quarter for the large Canadian banks under our coverage … We forecast the average core EPS for the large Canadian banks under our coverage to increase 2 per cent QoQ but decline 6 per cent year-over-year in Q3/23. Our Q3/23 core EPS estimates decrease 7 per cent QoQ on average, primarily reflecting lower assumed YoY growth in capital markets revenues. We also make smaller changes to other segments including Corporate and Wealth Management … We expect capital markets revenues to decrease 9 per cent YoY for the large Canadian banks under our coverage. The top 5 U.S. capital markets banks experienced a 10-per-cent YoY decrease in revenues in Q2/23, and we reflect a similar decline for the large Canadian banks under our coverage. For TD, we believe stronger QoQ results from Cowen will partially offset our YoY decline assumption”
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Morgan Stanley chief U.S. equity strategist Michael Wilson explained what he got wrong about markets so far this year,
“Back in 2020, we turned very bullish on equities on this shift to fiscal dominance. Subsequently, we also indicated that it would lead to a period of hotter but shorter economic and earnings cycles, mainly because the Fed would not have the same flexibility to proactively extend economic expansions … We also argued that catching these cycles on both the upside and downside would be critical for equity investors to generate good real returns. In 2020-22 we found ourselves on the right side of that dynamic, both on the upside and downside. This year, not so much. Part of the reason we’ve found ourselves offside this year is that the fiscal impulse returned with a vengeance and remained quite strong in 2023 – something we didn’t factor into our forecasts. In fact, we have rarely ever seen such large deficits when the unemployment rate is so low … The main takeaway for the equity market this year is that fiscal policy has allowed the economy to grow faster than forecast, giving rise to the consensus view that the risk of a recession has faded considerably… the limits of such fiscal policy are one reason why Fitch downgraded U.S. Treasury debt last week. Combined with the substantial increase in the supply of Treasury notes and bonds expected to fund these government expenditures, bond markets have sold off considerably this week. This should start to call into question equity valuations, which were already high before the recent rise in yields”
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BofA Securities economist Carlos Capistran raised his growth estimates for the Canadian economy thanks to the house view that the U.S. economy will enjoy a soft landing rather than a recession,
“If the US is not going into a recession, then we think the Canadian economy may be able to avoid one as well. The Canadian economy is already decelerating and the strong 3.1-per-cent quarter-over-quarter saar GDP growth in 1Q is likely to be followed by a more modest 1.2-per-cent qoq saar growth rate in 2Q . But the main driver of the deceleration so far has been the goods producing sector, not services. And if the US avoids a recession this may help Canadian exports enough to achieve a soft landing … We increase our GDP growth forecasts for Canada to 1.6 per cent for 2023 (1.4 per cent before) and to 0.6 per cent for 2024 (0.2 per cent before). The increase is driven in part by the higher than-expected growth in 1Q and the strong labor market. But the main driver is the change in U.S. outlook. In our new forecasts we do expect a deceleration but not a recession . We expect Canada to grow below its historical growth rate and slower than the U.S.”
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Diversion: “Over 100 Million Americans Under Severe Storm Watch” – Gizmodo