Canada ‘avoiding the worst, but far from the best', says BMO strategist

Globe and Mail

20-05-2025

Daily roundup of research and analysis from The Globe and Mail's market strategist Scott Barlow
BMO Canadian rates and macro strategist Benjamin Reitzes assesses the domestic economy as 'avoiding the worst, but far from the best',
'Despite the ongoing risks to the economy, we're upgrading the outlook for Canadian GDP growth. For 2025, we are forecasting 1.0% growth, up from 0.7% previously. For 2026, we are forecasting 1.2%, up from 1.0% previously. There continues to be extreme uncertainty around the outlook, and we could see significant revisions in either direction over the coming months. Indeed, we are still projecting negative growth for Q2 and Q3 (though a shallower contraction), qualifying as a so-called technical recession. While we're anticipating modestly stronger growth, that likely won't keep the Bank of Canada from cutting rates again at the next policy meeting in early June. The current tariff backdrop is closer to the BoC's Scenario 1 from the April MPR, though auto tariffs amplify additional downside growth risks. In that scenario, inflation is largely benign (in no small part due to the end of the carbon tax), while a small output gap persists. The latter two factors would usually point to a BoC rate cut. We still get April CPI next week, and March/Q1/April flash GDP at month-end, but we continue to lean toward a rate cut in June'
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Citi head of U.S. equity strategy Scott Chronert sounds downright bearish,
'What stands out this week in the data is that we continue to push the valuation envelope as the macro backdrop underpinning our fundamental outlook weakens. Our market implied FCF growth measure reached a new 15yr high alongside traditional and cross asset valuations all pushing into the top decile. Three important macro inputs to our earnings models released this week have all significantly underperformed our base case assumptions. Earlier in the week, the Fed's Senior Loan Officer Survey showed tightening of credit conditions while banks saw reduced demand for consumer loans. This morning, consumer sentiment fell again with declines in both political party affiliation breakouts. Lastly, import prices increased MoM for April, misaligned with our base case assumption that foreign suppliers will absorb a portion of tariffs by lowering prices. Lags are likely here so we may need another month or two of data to draw a conclusion'
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Equity markets have been climbing despite negative U.S. profit news which is a bit confusing.
RBC Capital Markets head of U.S. equity strategist Lori Calvasina says there's more negative profit news ahead,
'The big things you need to know: First, the S&P 500 EPS backdrop has stabilized, but we still anticipate further downward revisions for 2025 S&P 500 EPS. After a preliminary model refresh, we are maintaining our 2025 S&P 500 EPS forecast of $258, which is below the bottom-up consensus of $265. Second, we've updated our S&P 500 valuation model to reflect updated RBC house views on key macro variables like interest rates and inflation. It suggests that last week's gap up in the stock market was largely deserved, but that upside from here may be limited without another major step-up improvement in broader macro expectations. Third, we outline our thoughts on the suddenly sour news flow for stocks'.
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Wells Fargo strategist Austin Pickle recommends selling the rally in emerging markets stocks which is interesting for Canadi9an investors in light of the long term correlation between the (currency adjusted) TSX and MSCI Emerging Markets index,
'The long-term EM equity track record has been uninspiring EM earnings have barely budged since 2007, and index levels remain roughly 15% below their pre-global financial crisis highs. These figures stand in stark contrast to the S&P 500 Index, which has delivered impressive earnings growth and returns over the same period. Meanwhile, a study of volatility reveals that EM experienced nearly triple the number of bear markets defined as drops of 20% or more — during this time. In the case of EM, higher risk has not translated into higher returns these past 18 years. Some core structural issues also help to keep EM a 'show me' story. These include political and economic instability, corporate governance concerns, variable regulatory risks, as well as China's excessive debt, slumping property sector, and slowing growth brought on by the planned shift to a consumer-led economy'.
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Bluesky post of the day:
Diversion: 'The economics of sleep' – Marginal Revolution