Canadian stocks are poised for comeback

Less than a year ago, investors had a “pessimistic and fear-driven outlook” for Canadian stocks.

That’s how Brian Belski, chief investment strategist at BMO, characterized the negative sentiment of investors for Canadian stocks last July.

Belski, then and now a bull on Canadian equities, was a lonely voice anticipating a comeback for the S&P/TSX.

Indeed, a comeback seemed unlikely. In 2023, the S&P 500, the broadest U.S. market index, trounced its Canadian counterpart with an increase of 22 per cent in value to the meagre 5.8 per cent gain posted by the S&P/TSX.

But how quickly things can change.

The S&P/TSX now looks set to outperform its U.S. counterpart this year.

Analysts polled by Reuters in February forecast a 2.5 per cent increase in the S&P/TSX this year, and a record high in the index by mid-2025.

By contrast, Julian Emanuel, chief equity strategist at Evercore ISI, this month forecast a drop of 9.7 per cent in the S&P 500 by year end from its April 1 peak.

Already this year, Canadian stock performance has come close to matching U.S. equities. The S&P/ TSX has gained 4.5 per cent year to date to the S&P 500’s increase of 4.7 per cent.

Meanwhile, the rally in U.S. stocks appears to have ended this month, with investors now worried that inflation is running too high in the U.S. — at 3.5 per cent to Canada’s 2.9 per cent — for the U.S. Federal Reserve Board to cut interest rates this year.

The Bank of Canada, however, is expected to cut rates by as much as a full per cent this year from its current decades-high policy rate of five per cent.

Earlier this month, New Yorkbased BofA Securities advised global investors that the Canadian economy is “now in a clear upturn.”

Ohsung Kwon, BofA Securities’ U.S. and Canada equity strategist, forecasts that the Bank of Canada’s key lending rate will be 1.5 per cent lower than that of the Fed by the end of this year.

The TSX is weighted to high-yield stocks that benefit from interest rate cuts. Kwon noted that the TSX already yields 2.4 times more than the S&P 500.

That should make Canadian stocks more attractive to investors seeking rich dividend income, Kwon believes. He also expects global investors will look to equities in politically stable Canada as a hedge against geopolitical uncertainty.

Canadian economic fundamentals underlying stock values do point to an upturn.

The International Monetary Fund (IMF) forecasts stronger GDP growth in Canada next year than in the U.S.

The IMF expects Canadian GDP growth of 2.3 per cent in 2025, compared with 1.9 per cent for the U.S. and 1.7 per cent average growth for all advanced economies.

The IMF is also forecasting growth in Canadian GDP per capita, the chief measure of standard of living, of 3.9 per cent next year, to $78,388.

And it predicts continued annual per capita GDP growth of about 3.3 per cent in coming years, to $88,878 by 2029.

The U.S. market is pricey. The S&P 500 index trades at a multiple of almost 24 times earnings, compared to 18 for the S&P/TSX.

The S&P 500 is dominated by the so-called Magnificent Seven tech stocks. They alone account for almost 30 per cent of the index’s value.

Those megacap tech stocks — Meta Platforms, Alphabet, Amazon, Apple, Tesla, Microsoft and Nvidia — drove the S&P 500’s powerful rally in 2023 and early 2024.

But mounting investor concerns about slowing U.S. economic growth, lacklustre corporate profits and higher for longer U.S. interest rates have trimmed 8.3 per cent from the value of the average Magnificent Seven stock so far this month.

And that has dragged the S&P 500 down by 5.5 per cent in April.

Underpriced sectors of the Canadian market include banking, telecom and real estate investment trusts (REITs), as well as selected manufacturing, resource and consumer stocks.

On average, the Big Five banks are trading at an 18 per cent discount to their most recent highs. The Big Three telecom stocks are each down about one-third from their highs.

Pipeline operators Enbridge and TC Energy, boasting some of the richest dividend yields in North America at 7.9 per cent each, are trading at a 20 per cent and a 35 per cent discount to their latest highs, respectively.

And trading at discounts to their two-year highs are H&R REIT (down 30 per cent) and CT REIT, which owns Canadian Tire properties (down 25 per cent).

Among other attractively priced blue-chip stocks are Canadian Tire (down 35 per cent from its latest peak); Magna International (down 45 per cent); Nutrien Ltd., the giant potash producer (down 43 per cent); and Ski-Doo maker BRP Inc. (down 20 per cent).

Betting against Canada has never been wise. That’s truer now than ever.

Canadian economic fundamentals underlying stock values do point to an upturn