A myopic focus on large-cap technology stocks combined with a broader reacceleration of S&P 500 profits is creating a once-in-a-generation investment opportunity, according to a research report from New York-based Richard Bernstein Advisors LLC (RBA).
The research team at RBA is led by founder Richard Bernstein, former chief U.S. quantitative strategist at Merrill Lynch. They are extremely bullish on most of the U.S. market outside of the Magnificent 7 group of technology giants – Alphabet, Nvidia Corp., Tesla Inc. , Microsoft, Apple, Amazon and Meta – that have outperformed since the pandemic began.
The strategists believe that forecasts for a soft landing in the U.S. economy are too pessimistic. They believe the economy, and profits by extension, are set to ramp higher. They note that in July, economists predicted no growth for the U.S. economy in the third quarter. Estimates climbed quickly to 3.0 per cent but even this wasn’t enough – the preliminary GDP estimate recently came in at 4.9 per cent. Nominal GDP growth – which excludes the impact of inflation – is near 8.5 per cent, which should help corporate profits.
To further support their case, RBA points to the OECD Leading Economic Indicators for the U.S., which has historically been correlated to the profit cycle. The leading indicators have troughed and began a move higher, implying a similar move for broader earnings growth.
RBA compares the relative valuation levels of the Magnificent 7 stocks and the equal weighted S&P 500 to a “misbalanced seesaw.” The former’s PE ratio is above 40 while the equal weighted benchmark, which is essentially an average of everything else, is about 15 times. The strategists expect that the seesaw, which currently favours the Magnificent 7, is about to swing the other way.
RBA’s projected scenario is dependent on a strengthening in U.S. economic growth causing an increase in the number of companies representing strong earnings growth, enough of them to draw investor assets away from the Magnificent 7. The best way for investors to gauge the success of failure of the forecast is to watch U.S. economic growth closely.
Investors who agree with Bernstein’s views may find an exchange-traded fund like the Invesco S&P 500 Equal Weight ETF (RSP-A) quite attractive right now.
— Scott Barlow, Globe and Mail market strategist
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Stocks to ponder
Air Canada (AC-T) The airline is generating strong profit growth amid surging demand from travel-hungry customers. But the stock is in a steep nosedive, suggesting that investors are growing increasingly worried about the future, reports David Berman.
The Rundown
Is the cryptoverse as good as gold? Spot bitcoin ETFs aim to whip up U.S. demand
Bitcoin, the original crypto rebel, is racing into the heart of the financial establishment with an exchange-traded fund that tracks its price. But will it strike gold? Here is what some strategists and fund managers are saying.
Bond fund managers head for third year of losses for first time in decades
Many of the world’s biggest bond funds are facing their third straight year of losses for the first time in roughly 40 years, as a relentless U.S. economy sends bond yields to their highest levels in more than a decade. Yet far from being put off, investors are loading up on bonds again in 2023 after bailing out of the market last year, drawn in by the same run-up in yields that has caused so much pain, as Reuters reports.
Micro stocks shine in China’s flagging share market
China’s annus horribilis has seen its stock markets fall, funds run up losses and foreign investors run for the exit. But areas of the market dominated by small stocks and frequented by the country’s retail investors have done surprisingly well, as Reuters reports.
Bears bet big that nickel can close the product gap
The LME three-month nickel price has been on the slide for most of the year, sucking in momentum-tracking technical funds. Currently trading around US$18,000 per tonne, nickel is down by 42% on the start of January and challenging chart support levels dating back to late 2021. The technical weakness is a mirror on an overwhelmingly bearish fundamental picture. The global nickel market is entering a period of massive oversupply thanks to an Indonesian production boom. Everything is pointing to still lower prices. However, this being devilish nickel, things are not that simple, says long-time metals journalist Andy Home.
Will natural gas prices keep rising?
Based on expectations of higher demand, U.S. natural gas prices have been on an upward trend since March. Will it last? Brian Donovan takes stock of the situation.
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What’s up in the days ahead
Ian McGugan takes a look at the growing divergence between Canadian and U.S. households – and how it points to trouble ahead for consumer stocks in this country.
TORONTO – Strength in the base metal and technology sectors helped Canada’s main stock index gain almost 100 points on Friday, while U.S. stock markets climbed to their best week of the year.
“It’s been almost a complete opposite or retracement of what we saw last week,” said Philip Petursson, chief investment strategist at IG Wealth Management.
In New York, the Dow Jones industrial average was up 297.01 points at 41,393.78. The S&P 500 index was up 30.26 points at 5,626.02, while the Nasdaq composite was up 114.30 points at 17,683.98.
The S&P/TSX composite index closed up 93.51 points at 23,568.65.
While last week saw a “healthy” pullback on weaker economic data, this week investors appeared to be buying the dip and hoping the central bank “comes to the rescue,” said Petursson.
Next week, the U.S. Federal Reserve is widely expected to cut its key interest rate for the first time in several years after it significantly hiked it to fight inflation.
But the magnitude of that first cut has been the subject of debate, and the market appears split on whether the cut will be a quarter of a percentage point or a larger half-point reduction.
Petursson thinks it’s clear the smaller cut is coming. Economic data recently hasn’t been great, but it hasn’t been that bad either, he said — and inflation may have come down significantly, but it’s not defeated just yet.
“I think they’re going to be very steady,” he said, with one small cut at each of their three decisions scheduled for the rest of 2024, and more into 2025.
“I don’t think there’s a sense of urgency on the part of the Fed that they have to do something immediately.
A larger cut could also send the wrong message to the markets, added Petursson: that the Fed made a mistake in waiting this long to cut, or that it’s seeing concerning signs in the economy.
It would also be “counter to what they’ve signaled,” he said.
More important than the cut — other than the new tone it sets — will be what Fed chair Jerome Powell has to say, according to Petursson.
“That’s going to be more important than the size of the cut itself,” he said.
In Canada, where the central bank has already cut three times, Petursson expects two more before the year is through.
“Here, the labour situation is worse than what we see in the United States,” he said.
The Canadian dollar traded for 73.61 cents US compared with 73.58 cents US on Thursday.
The October crude oil contract was down 32 cents at US$68.65 per barrel and the October natural gas contract was down five cents at US$2.31 per mmBTU.
The December gold contract was up US$30.10 at US$2,610.70 an ounce and the December copper contract was up four cents US$4.24 a pound.
— With files from The Associated Press
This report by The Canadian Press was first published Sept. 13, 2024.
TORONTO – Canada’s main stock index was down more than 200 points in late-morning trading, weighed down by losses in the technology, base metal and energy sectors, while U.S. stock markets also fell.
The S&P/TSX composite index was down 239.24 points at 22,749.04.
In New York, the Dow Jones industrial average was down 312.36 points at 40,443.39. The S&P 500 index was down 80.94 points at 5,422.47, while the Nasdaq composite was down 380.17 points at 16,747.49.
The Canadian dollar traded for 73.80 cents US compared with 74.00 cents US on Thursday.
The October crude oil contract was down US$1.07 at US$68.08 per barrel and the October natural gas contract was up less than a penny at US$2.26 per mmBTU.
The December gold contract was down US$2.10 at US$2,541.00 an ounce and the December copper contract was down four cents at US$4.10 a pound.
This report by The Canadian Press was first published Sept. 6, 2024.
TORONTO – Canada’s main stock index was up more than 150 points in late-morning trading, helped by strength in technology, financial and energy stocks, while U.S. stock markets also pushed higher.
The S&P/TSX composite index was up 171.41 points at 23,298.39.
In New York, the Dow Jones industrial average was up 278.37 points at 41,369.79. The S&P 500 index was up 38.17 points at 5,630.35, while the Nasdaq composite was up 177.15 points at 17,733.18.
The Canadian dollar traded for 74.19 cents US compared with 74.23 cents US on Wednesday.
The October crude oil contract was up US$1.75 at US$76.27 per barrel and the October natural gas contract was up less than a penny at US$2.10 per mmBTU.
The December gold contract was up US$18.70 at US$2,556.50 an ounce and the December copper contract was down less than a penny at US$4.22 a pound.
This report by The Canadian Press was first published Aug. 29, 2024.
