U.S. stimulus wave will lift Canadian stocks, too: analyst

Proposed spending said to be most in six decades; TSX set for new highs

The U.S. Senate's vote Wednesday to approve the blueprint of a US$3.5-trillion budget just a day after supporting a $1-trillion infrastructure spending plan shows a flood of government spending that's bound to boost stocks in Canada as well, given its status as America's leading trade partner.

The infrastructure plan has bipartisan support, although the budget is only a blueprint at this point indicating spending goals, and faces a tough ride in the House of Representatives. Although Democrats control the House, their moderate and progressive wings will likely battle over the details.

Still, the amount of proposed U.S. government budget spending is said to be the most in six decades, with plans to expand the country's funding of education, health care and climate change-fighting initiatives. The infrastructure plan targets repairs to the nation's roads, railways and airports, boosting internet connectivity and expanding power grid resilience.

Stocks are already performing near record highs as the pandemic recedes and the economy opens. Even before the U.S. Senate voted on the spending measures the bullish outlook for markets largely remains intact, says Brian Belski, chief investment strategist at BMO Capital Markets.

“Vaccine rollouts, reopening optimism, record fiscal and monetary stimulus, and improving economic growth continue to help push U.S. stocks higher,” Belski said in an Aug. 6 report. “In addition, corporate earnings results have far exceeded expectations so far this year.”

To be sure, Belski says there have been some choppy trading waters created by concerns over the Delta variant and the absence of a significant market correction this year. Also, he says stock gains for the rest of the year won't be as strong as 2021's first six months when economic recoveries propelled prices.

The case for Canadian stocks appears similar to the U.S., if slightly less so following a mixed July, Belski said. But the S&P/TSX index is still ready to hit new records in the year's second half because of ties to U.S. growth, better-than-expected earnings and piles of corporate cash waiting to be deployed, he said.

“We continue to believe Canadian equities provide attractive value opportunities and room to beat still relatively modest expectations,” the BMO analyst said in his report. “Our continued bullish outlook for the TSX is driven by several key pillars of strength that ... remain supportive of earnings growth and the path back to normalcy.”

Canadian stocks tied to the U.S. will get the biggest boost in cash flow and earnings, especially those in sectors of consumer discretionary, industrials, materials and financials, where Belski said the bank retains an “overweight” exposure. Energy and resource companies “will have their heyday again,” but not for three years until global growth re-synchronizes, he said.

“There remains an attractive value proposition within Canadian equities for those investors that would like to increase their U.S. growth exposure,” Belski said. “Yes, Canada as a value play — especially when examining non-resource sectors.”

Communication services, led by companies such as Rogers, Bell and Telus, is BMO Capital Market's preferred equity income industry as it overcomes some challenges in regulation, revenue and capital spending commitments.

“Communication services has many of the hallmarks of a sector with sustainable long-term dividend growth potential, particularly relative to the other high dividend yield sectors,” Belski said. “Canadian communication services remains an essential point of stability within Canadian-centric portfolios and is one of the most effective ways to add yield among all the higher-yielding sectors.”

Among U.S. industries, BMO Capital Markets says there's opportunity in selective health-care plays, and in materials, an area on the S&P 500 that's down 11 per cent from its mid-May high.

“This underperformance has largely been a product of the rotation out of value/cyclicals and into growth ... as opposed to deterioration in the sector's fundamentals, which are still positive,” Belski said. “In addition, recent performance struggles versus the overall market has helped push relative valuation for materials to its lowest level since 2001.”

In health care, “relative valuations sit well-below historical norms and dividend trends remain attractive, but earnings growth has lagged the market,” the bank says. “That being said, we do see opportunities in health care and view the group as a pick-your-spots play given its low and falling intra-stock performance correlations.”