TSX HAS RECORD HIGH IN ITS SIGHTS.

The S& P/ TSX Composite Index has been one of the developed world’s bestperforming stock markets this year, rallying more than 15 per cent and now closing in on its record high of 15,625.73.

This week the index shot past 15,000, the first time it’s seen that mark in more than a year. What’s more, if the strong performance of Canadian stocks can hold until year-end, this will be the first time since 2010 that the TSX outperforms the S&P 500.

Canadian stocks have been led by a rebound in energy stocks and the Canadian banks, the latter of which have posted much better earnings than the market has been expecting. The banks have been under increased scrutiny l ately as Canada’s economy has floundered because of low oil prices and record levels of debt held by consumers.

The rally is certainly a welcome relief after an abysmal 2015 — the TSX fell nine per cent that year and was one of the worst performing stock markets in the developed world.

But of course it also has investors asking if the good times can last. The last time the TSX hit a record high in 2014, it didn’t hold that level for very long and went on to crash into a bear market shortly after.

Brian Belski, chief investment strategist at BMO Capital Markets, predicts there’s still more fuel left in the rally, seeing the index hitting 16,000 by the end of next year. But he sees the TSX underperforming the S&P 500 once again over the next 12 months.

“Canadian stocks will likely take a back seat to their U. S. neighbours again in 2017,” Belski said. “Indeed, a broad policy shift in the U.S., especially relative to Canada (less regulation and renewed fiscal stimulus), will likely see asset flows swing back to the U.S. at some point during the year.”

Economist forecasts for t he Canadian e c onomy are pretty subdued. The country’s l abour market continues to see rising unemployment due to ongoing layoffs in the resource sector.

Hopes that a weak loonie and cheap fuel prices would boost Canadian exports are just that right now — hopes. The data continues to show anemic export growth.

Those factors have put a lid on earnings growth for Canadian companies. What’s more, it raises questions about how much higher TSX stocks can go, especially as the index’s multiples have increased during the recent rally.

“At this writing, the Canadian benchmark is trading at 16.4 times forward earnings ( and the energy sector at 34 times),” write Stéfane Marion and Matthieu Arseneau, economists at National Bank Financial Markets, in a note to clients.

The pair point out that the current forward earnings multiple implies TSX earnings need to grow 22.6 per cent in the coming 12 months — more than twice the 10.8 per cent earnings needed to justify the S& P 500’s multiple.

“For the Canadian economy to support that earnings growth, despite a limited upside for domestic demand after the debt binge and housing surge of recent years, much is riding on exports,” the analysts write.

Unfortunately, the muchhoped for renaissance in Canadian exports has yet to materialize, despite more than two years of accommodative conditions — a weak loonie and low oil prices. The decline in value of resource exports — many of which are priced in U.S. dollars — is not being made up for by growth in manufacturing exports.

Belski said that Canada has benefitted this year from a kind of safe- haven flow, as the American election campaign and the Brexit in Europe led foreign investors to seek out Canadian assets as a source of stability.

But now that investors are beginning to warm up to a Trump presidency, Canadian stocks could lose out.

“As fear and negative rhetoric potentially abate in the U. S. during the year, global investors may indeed sharpen their focus on the U. S. again,” Belski said.

The TSX closed out at 15,075.20 on Thursday, a loss of 5.71 points or 0.04 per cent. All the index needs is a 3.6 per cent rally to hit a new record and it’s currently trading in what is seen as one of the most profitable seasonal periods of the year (November to December).

National Bank’s Marion and Arseneau, however, are skeptical about a new record for the TSX anytime soon. They predict the index will end 2017 at 15,400 as the current rally runs out of steam.

“At this juncture, until we get to know the actors a little better, we prefer to keep our asset mix unchanged with an above- average weighting in cash,” the pair write.