Brian Belski is chief investment strategist with BMO Capital Markets
Amid the ongoing trade turmoil, Fed policy concerns, slowing global growth, and incessant recession prognostications, the resiliency of U.S. stocks was on full display during the first half of the year as the S&P 500 climbed to new all-time highs. Despite the ebbs and flow of the market and spikes in volatility, we remain confident in our 2019 S&P 500 price target of 3,000. And although the market will likely fail to match the pace set in the first half, we continue to believe the underlying fundamental and macroeconomic environment remains supportive of U.S. stocks, which should help lift the S&P 500 to new highs in the back half of the year.
Last August, the current bull market, which officially began in March 2009, became the longest post-WWII bull, in terms of actual days, surpassing that of the 1990s. At the time, this feat was largely accompanied by negative rhetoric with many pundits forecasting the imminent demise of the bull and a forthcoming recession. Here we are 11 months later and the bull is now more than 10 years old and still chugging along. Yes, “longest bull ever” certainly makes for a captivating headline, but when looking at annualized price gains during the period, the current bull market only ranks 9th out of 12 with a compound annual growth rate of just over 15 per cent. Indeed, bull markets and economic expansions do not simply end because they have been going on for too long. In fact, we believe the market is a market of stocks and these stocks are ultimately driven by fundamentals.
While we seem to have underestimated the length of this ongoing trade turmoil between the U.S. and China along with its potential negative impact on global economic growth and corporate earnings, we have not all of a sudden become ultra bears as it relates to earnings. In fact, our forecast still implies roughly 4 per cent earnings per share growth for the S&P 500 this calendar year, just about in-line with the bottom-up consensus. Furthermore trailing one-year earnings growth for the S&P 500 shows no indications of any extended EPS downturn - just a deceleration for most of 2019, followed by a reacceleration in 2020. As such, we remain constructive on earnings growth in the back half of the year and heading into 2020 with the probability of an earnings recession pretty low.
Overall, we believe the rest of the year will likely be a grind higher rather than a straight shot with periods of elevated volatility in between. As such, we would recommend that investors use periods of weakness and overreactions as opportunities to add to positions. And while price gains will likely not emulate those seen in the first half of this year, we believe the resiliency of U.S. stocks will continue in the second half and help push the S&P 500 to new highs.
In the U.S., Communication Services, Financials, Health Care, Industrials, and Technology represent our recommended overweight sectors in the S&P 500, while Consumer Staples, Real Estate, and Utilities are our underweight sectors. We have market weight recommendations on Consumer Discretionary, Energy, and Materials.
As for Canada....
Within Canada, although the sharp recovery in the first half is unlikely to be matched in the second half of 2019, we continue to believe Canadian equities provide attractive value and relative stability. Our forecast is still for the S&P/TSX Composite Index to reach 17,000 by year-end, representing a modest gain just shy of 4 per cent from current levels. Overall, our base case represents a “steady as she goes” outlook, driven primarily from a continued earnings recovery, with a relatively modest price-to-earnings valuation expectation by the end of this year of just 15.5 times based on 12-month trailing earnings. That’s still well below the historical average of 17.3 times.
Broadly speaking, this continued bullish outlook for the TSX is driven by several key pillars of strength that we believe remain supportive of earnings growth and stable valuations. In particular, we believe the US economy has entered a goldilocks phase of the cycle, which will likely be the key pillar of support for earnings growth in the quarters ahead; additionally the stabilization in commodity prices will likely provide key valuation support for the market; and continued fundamental strength in Financials will underscore the stability of the TSX and help alleviate concerns surrounding the domestic consumer and economy.
Given our modest valuation expectations for the TSX, we continue to believe our projection provides Canadian stocks with an opportunity to under promise and over deliver with the main risk to the upside if valuations continue to revert to historical averages. Furthermore, any reacceleration in U.S. growth or stabilization in Emerging Markets could provide additional earnings support heading into 2020 and potential upside to our 2019 outlook. Stabilization of EM economies and stock markets would be good for Canada because of the heavy TSX weightings in resources.
In Canada, Communication Services, Energy, and Financials represent our Overweight sectors in the S&P/TSX, while Health Care, Real Estate, and Utilities are our Underweight sectors. We are Market Weight Consumer Discretionary, Consumer Staples, Industrials, Information Technology, and Materials.
Brian Belski is chief investment strategist with BMO Capital Markets