Posthaste: TSX vs S&P 500: Canadian stocks are revving up for an 'outperformance cycle' - Financial Post

Good morning!

The U.S. stock markets may be looking fatigued, but there is plenty of gas left in Canadian stocks, according to analysts.

The S&P/TSX Composite Index, up 46 per cent in U.S. dollars over a 12-month period, and the S&P 500 benchmark (trading 40 per cent above the same period last year) are both trading at record highs, but despite solid gains in the past 12 months, the TSX has not outperformed the S&P 500 all that meaningfully, according to Scotiabank.

“Considering the length of the previous underperformance cycle and current macro tailwinds, we would have expected a somewhat larger gap,” Jean-Michel Gauthier, analyst at Scotiabank, said.

The TSX is currently trading at 16.0x forward earnings and 2.2x book value, compared to the S&P 500’s pricier 21.2x forward earnings and 4.6x books — levels last seen during the tech bubble.

“In our view, the TSX has a large valuation rerating potential that could power an extended outperformance cycle, as it did post the tech bubble. Perhaps the missing ingredient of EPS (earnings per share) growth will finally tip the scale in the TSX’s favour,” the Scotiabank analyst noted.

Indeed, the earnings trends, which has been in favour of U.S. stocks over the past decade, may finally turning in Canada’s favour.

“Slower growth in U.S. tech just as Canadian energy and banks’ EPS are on the upswing could keep this trend going,” Gauthier noted. “Overall, given advantageous valuation levels, macro tailwinds, and a growing profitability edge, we would stick to a TSX over S&P 500 bias.”

BMO Capital Market’s chief investment strategist Brian Belski also lifted his forecast for the TSX Composite Index to 20,500 — a modest 1.4 per cent higher than its previous target. The index closed at 20,145.25 on Monday, around 16 per cent higher since the start of the year.

“Yes, the risks to this target are still balanced to the upside, in our opinion,” Belski said in a note last week. “Overall, our continued bullish outlook for the TSX is driven by several key pillars of strength that we believe remain supportive of earnings growth and the path back to normalcy.”

This includes stimulus measures coming down the pipe in the U.S. which will wash over Canadian stocks, too.

Canadian companies, who are also reportedly sitting on an approximately $140-billion cash pile, may finally be willing to part with their cash as vaccination rollouts accelerate and the North American economy offers new business and investment opportunities. An improved outlook would encourage companies to boost dividends, share buybacks and seek out mergers and acquisitions targets.

“As such, we believe the TSX is likely to continue to set new all-time highs in the second half of 2021as confidence in the earnings recovery grows and the market slowly transitions back to normalcy,” Belski noted.

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Posthaste: TSX vs S&P 500: Canadian stocks are revving up for an 'outperformance cycle' - Financial Post
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