Stan Wong, portfolio manager at Scotia Wealth Management
FOCUS: North American large caps, ETFs
Top Picks: Caterpillar, Netflix, iShares Core S&P Mid-Cap ETF
MARKET OUTLOOK:
After five consecutive months of gains, the S&P 500 Index experienced a decline of about one per cent in October. With the uncertainties surrounding the U.S. presidential election now behind us and the typically volatile month of October concluded, there is potential for a positive trajectory for equities over the coming months. Historically, the period from November through January has been favourable for the S&P 500 Index. Since 1950, these three months have averaged a 4.4 per cent return, making them the best performing three-month segment of the year for the index.
At The Stan Wong Group, we maintain a constructively optimistic outlook for equities. The macroeconomic backdrop and corporate earnings projections remain solid. Recent economic indicators reflect a resilient U.S. economy, with real gross domestic product (GDP) growth at 2.7 per cent for the third quarter of 2024, driven primarily by strong consumer spending in durable goods. Inflation has eased to 2.4 per cent, and the labour market remains stable with the unemployment rate steady at 4.1 per cent. Moreover, the U.S. Federal Reserve’s shift towards monetary easing fosters a conducive environment for equities. U.S. corporate earnings forecasts are also promising, projecting growth of 13 per cent in 2025 and 11 per cent in 2026. Additionally, U.S. money market assets have reached a record high of over US$6.5 trillion, which could further support equity markets. Overall, the U.S. economic landscape appears sturdy, with no signs of buckling in the near-term.
Our team’s investment strategy remains focused on identifying high-quality, secular growth companies to enhance portfolio performance. We favour sectors such as health care, consumer discretionary, financials, and technology, targeting companies that exhibit strong competitive advantages, reliable earnings, and reasonable valuations. Our strategic and tactical allocations are designed to optimize returns while effectively managing risk for our clients. A well-diversified portfolio is essential for risk management and boosting returns, complimented by a comprehensive financial plan to navigate market volatility effectively.
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TOP PICKS:
CATERPILLAR (CAT NYSE)
Caterpillar is the world’s largest heavy equipment manufacturer of construction and mining machinery. With almost US$64 billion in forecasted fiscal 2025 revenue, Caterpillar distributes its machinery to customers in more than 190 countries. Under the new U.S. Republican administration, infrastructure spending plans are expected to rise, thereby benefiting Caterpillar. Additionally, potential corporate tax cuts, deregulation and trade policy measures favouring domestic manufacturing could help CAT shares. Overseas, fiscal stimulus measures in China could also benefit Caterpillar. From a technical perspective, the shares have broken above previous resistance levels and have marked a clear uptrend of higher highs and higher lows since late-2022. The company reports its next quarterly results on Feb. 2.
NETFLIX (NFLX NASD)
With over 280 million global subscribers and a projected revenue of nearly US$44 billion for fiscal 2025, Netflix continues to dominate the subscription streaming service industry, driven by its commitment to original content that fosters a loyal customer base. Netflix continues to expand its footprint into the emerging markets, tapping into significant subscriber growth potential. Recent deals for sports broadcasting rights, including partnerships with the NFL and WWE, highlights its expansion into live content, while the introduction of an advertising-supported subscription tier caters to cost-conscious consumers and attracts advertisers. With a clear uptrend channel of higher highs and higher lows, NFLX shares have been outpacing the broader S&P 500 Index since early-2022. The shares have also broken above its late-2021 highs. Netflix is forecasted to achieve an annual earnings growth rate of over 35 per cent over the next several years. At just one times PEG ratio (price-earnings to growth), NFLX shares are relatively inexpensive compared to most other technology and communications stocks. The company reports its next quarterly results on Jan. 23.
ISHARES CORE S&P MID-CAP ETF (IJH NYSEARCA)
The iShares Core S&P Mid-Cap ETF (IJH) provides investors with exposure to a diversified portfolio of about 400 U.S. mid-cap companies, characterized by market capitalizations between US$2 billion to US$10 billion. Notable holdings in this ETF include Illumina, Williams-Sonoma, Toll Brothers, and Lennox International. Currently, mid-cap stocks are trading at a significant valuation discount compared to large-cap stocks, while also offering higher earnings growth potential. The S&P Mid-Cap 400 Index trades at a price-to-earnings (P/E) multiple of 18 times, with expected earnings growth rates of over 14 per cent in 2025 and more than 16 per cent in 2026. In comparison, the S&P 500 Index has a P/E multiple of 25 times, with forecasted earnings growth of 13 per cent in 2025 and 11 per cent in 2026. A falling interest rate environment could further benefit mid-cap companies by improving access to capital, reducing borrowing costs, and enhancing expansion opportunities. Historically, mid-cap firms have outperformed their large-cap counterparts following interest rate cuts, making them an attractive option for investors looking for growth potential in the current economic landscape.
| DISCLOSURE | PERSONAL | FAMILY | PORTFOLIO/FUND |
|---|---|---|---|
| CAT NYSE | Y | Y | Y |
| NFLX NASD | Y | Y | Y |
| IJH NYSEARCA | Y | Y | Y |
PAST PICKS: NOVEMBER 16, 2023
ALPHABET (GOOGL NASD)
- Then: US$136.93
- Now: US$177.72
- Return: 30%
- Total Return: 30%
MCKESSON (MCK NYSE)
- Then: US$450.78
- Now: US$601.72
- Return: 33%
- Total Return: 34%
NOVO NORDISK A/S (NVO NYSE)
- Then: US$99.53
- Now: US$106.67
- Return: 7%
- Total Return: 8%
Total Return Average: 24%
| DISCLOSURE | PERSONAL | FAMILY | PORTFOLIO/FUND |
|---|---|---|---|
| GOOGL NASD | Y | Y | Y |
| MCK NYSE | Y | Y | Y |
| NOVO NASD | Y | Y | Y |