BMO chief investment strategist Brian Belski has previously touted Canadian stocks for their cash flow potential but the TSX significantly underperformed the technology-heavy S&P 500 during May. Domestic equities will continue to struggle as long as the three largest sectors – financials, energy and materials – all underperform.
The S&P/TSX Composite lost 5.2 per cent last month, trailing the S&P 500′s 0.25 per cent appreciation. The domesticsector was the only group with positive performance at 10.1 per cent. This only partially offset the 5.4 per cent decline for financials, the 8.4 per cent drop for energy stocks and the 10.7 per cent loss for materials companies.
Mr. Belski reports that TSX earnings are running 3 per cent below his forecasts. He is expecting profit growth to stabilize in the latter half of the year but admits the risks are skewed to the downside. Investors should expect significant volatility in the event the financials and resource sectors, which account for 59 per cent of the benchmark, continue to see downwards earnings revisions.
Technology stock performance and global economic growth will drive the relative performance of domestic and U.S. stocks in the months ahead. Technology forms 27 per cent of the S&P 500 but only about 7.0 per cent of the TSX, so the domestic benchmark will underperform for as long as tech leads the market.
A disappointing economic recovery in China has significantly depressed commodity prices, particularly metals. A stronger expansion, and better global growth generally, would better support commodity prices and the relative returns from Canadian stocks.This is the Globe Investor newsletter, published three times each week.
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