Can Canadian Stocks Catch Up with the Tech-Driven US Equities Surge?

Canadian stocks are experiencing a broad-based rally this year, which is the exact opposite of the US stock market, where only a handful of tech companies are leading the gains.

Source: S&P Global

“In Canada, you have had more opportunity within every sector to find names that have worked,” Mike Archibald, AGF Investments vice-president and portfolio manager, said.

In contrast, Archibald said the S&P 500 currently has become so dependent on a few stocks that it exhibits “the highest weighting for the top 10 that we’ve ever seen.”

Strategists see more upside in the Canadian benchmark, with 12% gains expected versus 6.5% for the S&P 500 over the next 12 months, according to data compiled by Bloomberg.

“Relative to the S&P 500, the TSX is trading at a significant discount. It does have a fairly wide valuation gap relative to where it normally sits,” Philip Petursson, IGM Financial chief investment strategist, said. “You could see some catch-up.”

“Mid-year cuts portend to a catapult, with inflationary trends easing over the last several quarters, the Bank of Canada ‘proactively’ entered the easing cycle on June 5. These more proactive easing cycles can be a strong positive catalyst for TSX performance,” says BMO chief investment strategist.

Regarding predictions for Canada's future rate cut trajectory, the big five Canadian banks see at least two more rate cuts in 2024. Royal Bank, Scotiabank, and CIBC predict the policy rate at 4% by December, while TD and Bank of Montreal estimate the interest rate at 4.25% by year's end.

At BofA Securities, equity and quant strategist Ohsung Kwon reported that a preliminary update of his proprietary Canada Cycle Indicator (CCI) indicated the sixth straight month of improvement. This is primarily due to widening bond yield differentials versus the U.S., commodity prices and a better earnings revision ratio – more upwards moving profit forecasts than downwards.

Mr. Kwon also notes that the economic growth differential relative to the U.S. is closing from record levels and TSX 60 earnings growth is now positive in year over year terms for the first time in 12 months.

If investors are confident that the TSX will soon catch up with the surging S&P 500, consider keeping an eye on the following stock index ETFs.

iShares S&P/TSX 60 Index ETF, an ETF that offers exposure to Canada's top 60 blue-chip stocks.

XIC tracks the S&P/TSX Capped Composite Index, a market-cap-weighted basket of stocks that accounts for about 95% of the market cap of the investable Canadian market. This produces a portfolio of 230-plus stocks that accurately represents the total Canadian stock market.

BMO S&P/TSX Capped Composite ETF offers a broad, market-cap-weighted portfolio that captures the large- and mid-cap opportunity set while charging a low fee.

Source: Bloomberg, The Global and Mail