(Bloomberg) -- The dramatic rally in U.S. stocks is showing signs of faltering while strategists say Canadian equities are ready to pull ahead.
The Canadian stocks benchmark touched a record high in July, climbing more than eight per cent this year, but it has struggled to keep pace with the high-flying S&P 500 Index’s 14 per cent gain. Mega-cap tech stocks drove the rally in the U.S., while Canada’s run has been more wide-ranging.
“This underperformance is NOT fundamentally justified,” Brian Belski, BMO Capital Markets’ chief investment strategist, told clients this week. “Canada is positioned for a significant catch-up trade, with Canadian small cap particularly well positioned.”
Lower interest rates, stronger earnings growth and broader stock leadership are poised to vault the Canadian market past its U.S. counterpart after lagging much of this year, he said. Indeed, the relative performance has already begun to invert, with the S&P/TSX Composite Index rising around four per cent in the last month and the S&P 500 edging lower.
And after the Bank of Canada’s move to cut interest rates for a second straight meeting on Wednesday, declining borrowing costs foreshadow a lift for the country’s high-yielding stocks.
“It’s exactly the wrong time to be negative on Canada,” Belski said in an interview, adding that stocks in the country have been outperforming despite concerns about the economy. Even stocks in the retail sector, like Aritzia Inc. and Dollarama Inc., “are killing it at a time when the Bank of Canada is worried about the economy slowing down.”
He sees the TSX outperforming the S&P 500 over the balance of the year.
Belski’s year-end target for the S&P/TSX of 24,500 implies a roughly eight per cent gain for the rest of the year. Consensus is even higher at around 25,224. In comparison, an average of strategists’ estimates for the S&P suggests a less than one per cent advance for 2024.
Bloomberg Intelligence strategists Gillian Wolff and Gina Martin Adams are also bullish on Canadian stocks.
“The earnings outlook is finally brightening for Canadian (S&P/TSX) equities,” they wrote. The benchmark’s earnings are poised to outpace U.S. earnings by the fourth quarter “after lagging far behind the past six quarters.”
That’s largely thanks to the outsized energy and materials weighting in Toronto, those sectors make up roughly 30 per cent of the total index. By comparison, energy and materials comprise just over six per cent of the S&P 500. Elevated copper and gold prices — as well as a new Canadian oil export pipeline — are poised to juice their corporate earnings.
While for the S&P 500, estimates suggest earnings for the Magnificent 7 peaked in the first quarter and “are poised to decelerate in the following quarters, giving the TSX ample opportunity to catch up,” Wolff and Adams said.
With assistance from Tatiana Darie
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