a day ago
Market Factors: Export-oriented stocks ready to bounce
This edition outlines why trade-oriented domestic stocks may rally and why Scotiabank strategists are even more skeptical about the outlook for Canadian bank stocks. The diversion discusses the best essay I've read this year. As usual we'll look ahead to the important data releases for the next week.
Brian Belski, BMO's chief investment strategist, is expecting a lucrative rally in trade-oriented domestic stocks in the second half of 2025. In part, this reflects hope that trade agreements are on tap at the upcoming G7 meetings in Alberta.
Mr. Belski cites corporate paralysis for helping set up the rally. Tariff fears have Canadian exporters issuing extremely cautious profit guidance, setting the stage for positive surprises for later in 2025.
The underperformance of the trade-oriented industrials and consumer discretionary sectors reached extremes in February 2025. (The S&P/TSX Consumer Discretionary index is considered export-focused because of its large weighting in auto stocks. In addition, index constituent Aritzia Inc. receives 58 per cent of its revenue from the United States).
At the time, the year-over-year return on consumer discretionary stocks trailed the S&P/TSX Composite's year-over-year result by over 15 percentage points. Industrials trailed by over 19 percentage points.
Earnings revisions for exporting sectors have been bleak. Positive profit updates as a percentage of the total have 'collapsed' in Mr. Belski's words. This ratio for both industrials and consumer discretionary stocks has fallen to levels historically associated with significant recessions.
Mr. Belski's Monday research report helpfully provides the results of a stock screen attempting to identify the biggest beneficiaries of the tariff victim recovery theme. The screen emphasized high quality, profitable companies that most underperform on days with significant (and negative) trade news from Washington.
The resulting stocks were presented in alphabetical order. Those with outperform ratings from BMO analysts are Air Canada, Aritzia inc., Boralex Inc., CIBC, Canadian National Railway Co., Canadian Pacific Kansas City Ltd., Cenovus Energy Inc., Linamar Corp., Mattr Corp., MDA Space Ltd., Magna International Inc., Premium Brands Holdings Corp., Precision Drilling Corp. and Stantec Inc.
The non-outperform names are ATS Corp., Cargojet Inc., Canadian Tire Corp., goeasy Ltd., Lundin Mining Corp., Richelieu Hardware Ltd., Saputo Inc. and Terravest Industries Inc.
The wildcard here is the Trump administration and its willingness and preparedness to provide clarity on Canada/U.S. trade. That's not a wildcard you want when making investment decisions. The recent underperformance of the exporting sector does, however, provide some margin of safety and big international political meetings have in the past been an occasion to announce major deals.
Scotiabank strategist Simon Fitzgerald-Carrier has moved bank stocks further into underweight territory in the firm's model portfolio as he expects provisions for credit losses [PCLs] to cut in to profit margins.
Mr. Fitzgerald-Carrier concedes that first quarter earnings for the banks were not disastrous but emphasized that PCLs as a percentage of gross loans and acceptances continued to climb. The last time this ratio was this high – ignoring the pandemic – was 2010 in the wake of the great financial crisis.
The strategist argues that tariffs will hurt domestic economic growth. The unemployment rate is already climbing and this will push PCLs higher. Higher PCLs have historically been correlated with lower price-to-earnings ratios for the sector.
Earnings momentum in the bank sector is still positive but flatlining, uninspiring particularly in comparison to insurance company expectations where profit forecasts continue to climb. Scotiabank believes insurance companies remain the better investment as they are better positioned to weather a weaker economy.
I announced/warned readers of my intention to subscribe to The Atlantic and the experiment is paying off nicely. The recent column What Happens When People Don't Understand How AI Works by former academic Tyler Austin Harper is amazing, debunking Silicon Valley claims about AI and providing important perspective.
The central conceit of AI, according to Mr. Harper, is based on the human tendency to associate language with intelligence. AI's ability to guess the phrase most likely to follow another is an exercise in probability, not thinking.
Mr. Harper pushes back on the claim that AI can act as an effective companion. Responding to a robotics professor's contention that AI can combat loneliness as a personalized form of interaction, he writes: 'The fact that the very point of friendship is that it is not personalized–that friends are humans whose interior lives we have to consider and reciprocally negotiate, rather than mere vessels for our own self-actualization – does not seem to occur to him.'
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When social media is full of investment advice, that's a good time to do nothing, writes Sam Sivarajan. And a recent study backs up that advice.
As investors are looking to diversify away from Wall Street, many are eyeing Latin America. Reuters has more.
There's a sharp division between the real world (where everything seems iffy) and the stock market (where everything is great), writes Tim Shufelt. Retail investors might be driving the big divergence.
The data calendar is light on both sides of the border for the upcoming week. The only economic release of note domestically is month-over-month manufacturing sales for April where a decline of 2.0 per cent is expected.
For domestic earnings Dollarama Inc. on Wednesday is pretty much it. The consensus analyst estimate is $0.835 per share.
U.S. CPI for May is out on Wednesday. Economists expect a month-over-month increase of 0.2 per cent and 0.3 per cent for the ex-food and energy reading. Producer prices for May will be released Thursday – a 0.3 per cent rise for the ex-food and energy data is forecast.
Relevant earnings reports include Oracle Corp. ($1.642 per share expected) on Wednesday and Adobe Inc. ($4.976) on Thursday.
