BMO's Belski says TSX outperformance has come to an end
Brian Belski, BMO Capital Markets' chief investment strategist, thinks the S&P/TSX Composite Index is no longer positioned to outperform stocks on Wall Street, a stance he has held over the past 12 months.
In May of 2024, Belski contended that the Canadian benchmark's relative value to the S&P 500, as well as several expected key catalysts and contrarian indicators, would mean the TSX would outperform.
That indeed panned out: the TSX has retuned more than 15% over the past year, compared to about 10% for the S&P 500. And those figures don't even account for the TSX's higher dividend payout relative to the U.S. benchmark.
'However, we believe Canadian stocks are now more likely to perform in line with their neighbour to the south over the next 12 months,' Mr. Belski said in a note Thursday morning.
'To be clear, we still believe Canada offers strong relative value, downside protection, and will continue to benefit from broadening equity performance. However, unfortunately we believe much of the 'catch-up' trade that we called for last year has likely played out," he said.
Mr. Belski emphasized that he's not recommending investors underweight Canadian equities. 'Instead, it reflects the sharp outperformance of the TSX as relative valuations have started to normalize, growth profiles have converged, and foreign flows have rebounded from deeply depressed levels. With most of these tailwinds likely behind us, we believe it will be tough for Canada to exhibit the same level of outperformance over the next 12 months.'
Mr. Belski has long maintained that the U.S. is in a 25-year secular bull market, and he's certainly not diverging from that view. That in itself would mean Canadian stocks, which largely follow the U.S. market, will perform well.
But he now believes 'the US is likely to return to its role as the primary fundamental driver of growth and ultimately re-take the leadership mantle as trade noise and risks subside.'
Mr. Belski said the spread between valuations of the TSX and the S&P 500, which BMO calculates using several measures such as price to earnings and price to book, has narrowed sharply over the last year - from a record spread of almost two standard deviations to under one standard deviation now. He expects Canada to continue to have a discount versus the U.S. going forward.
Mr. Belski also said Canadian earnings growth trends have now fully normalized to be back in line with the S&P 500. And foreign investment flows have rebounded sharply, and no longer offer a contrarian signal.
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