Report prepared by:
Ryan Lewenza, CFA, CMT North American Equity Strategist
2014 Year-End Forecast
Index EPS P/E Price
S&P 500 Index $115.50 17.0 1,960 S&P/TSX Composite Index $875 16.7 14,650
Sector U.S. Canada Preference
Financials Over Over U.S. Consumer Discretionary Under Market Canada Industrials Over Over U.S. Information Technology Over Over U.S. Energy Market Over
Canada Materials Under Under Canada Health Care Over Under
U.S. Consumer Staples Market Market Canada Utilities Under Under Canada Telecom Services Under Under Canada
Source: Portfolio Advice & Investment Research Over=Overweight Under=Underweight Market=Marketweight
This Document is for distribution to Canadian clients only. Please refer to Appendix A of this report for important disclosure information.
Q2/14 Equity Market Update
North American equities were up in Q1/14, led by the Canadian market. The S&P/TSX Composite Index (S&P/TSX) posted a gain of 5.2%, while the S&P 500 Index (S&P 500) advanced a more modest 1.3%. From a style perspective, small caps underperformed in the U.S. (outperformed in Canada), while value trumped growth.
We are upgrading the Canadian energy sector to overweight. Our constructive outlook for the energy sector has led to an increase in our year-end price target for the S&P/TSX to 14,650, from 14,250. Our S&P 500 price target remains unchanged at 1,960.
Most leading economic indicators we track are pointing to a recovery in economic momentum and growth in the coming quarters. Key areas of the U.S. economy continue to improve, supporting TD Economics
forecast for GDP growth of 2.7% in
2014, up from 1.9% in 2013. Canada’s economy should benefit
from the improving U.S. economy, but the slowdown in China is likely to weigh on our heavy resource-based economy.
Valuations for the North American equity markets have expanded markedly since the 2009 market lows, and are now at premiums to their long-term averages. Despite this, we continue to forecast additional gains for 2014, driven by improving corporate earnings.
The technical outlook for the North American equity markets remains positive. The S&P 500 is in a long-term uptrend and above its rising 50-week moving average (MA). The S&P/TSX broke above an importance resistance level of 12,900 in Q4/13, and is above key MAs. However, it is now trading at stiff resistance at 14,300, and we believe commodity prices will need to trend higher for the S&P/TSX to break above this level.
We maintain a cyclical bias, preferring the industrials, financials and information technology sectors. These sectors stand to benefit from an improving global economy, rising interest rates, and our expectations for a ramp up in corporate spending in the coming quarters. We are increasing our cyclical stance in Canada by upgrading the energy sector to overweight, and downgrading the health care sector to underweight. April 14, 2014