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In a hurry: TSX vs S&P 500: Canadian stocks are accelerating for a ‘cycle of superior performance’

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Good Morning!

US equity markets may look fatigued, but there’s a lot of gas left in Canadian stocks, analysts say.

The S & P / TSX composite index, up 46 percent in US dollars over a 12-month period, and the benchmark S&P 500 index (trading 40 percent above the same period last year) are trading at All-time highs, but despite its robust earnings over the past 12 months, the TSX hasn’t outperformed the S&P 500 significantly, according to Scotiabank.

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

The TSX is currently trading at 16.0x future earnings and 2.2x book value, compared to the S&P 500 price, 21.2x future earnings and 4.6x book, levels last seen during the tech bubble.

“In our opinion, the TSX has great potential for revaluation that could fuel a prolonged outperformance cycle, as it did after the tech bubble. Perhaps the missing ingredient of earnings per share (EPS) growth will finally tip the balance in favor of the TSX, ”the Scotiabank analyst noted.

In fact, earnings trends that have favored US stocks for the past decade may finally turn in Canada’s favor.

“Slower growth in US technology, just when Canadian banks and energy earnings per share are on the rise, could sustain this trend,” Gauthier said. “Overall, given the advantageous valuation levels, macro tailwinds and a growing profitability advantage, we would hold a TSX over the S&P 500 bias.”

BMO Capital Market chief investment strategist Brian Belski also raised his forecast for the TSX composite index to 20,500, a modest 1.4% higher than his previous target. The index closed at 20,145.25 on Monday, about 16 percent higher since the beginning 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 continue to support earnings growth and a path back to normal.”

This includes stimulus measures to be launched in the US that will also affect Canadian stocks.

Canadian companies, which are also reportedly sitting on a cash pile of roughly $ 140 billion, may finally be willing to part with their cash as vaccine launches and the North American economy accelerate. offers new business and investment opportunities. An improved outlook would encourage companies to increase dividends, share buybacks, and mergers and acquisitions.

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

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