BofA Securities strategist Ritesh Samadhiya has an extremely bullish forecast for global profit growth in a new report, one that may help answer one of the most important questions for active investors – is it time to buy more economically sensitive cyclical stocks?
The strategist focuses on BofA’s proprietary Global Wave Indicator, which uses global industrial and consumer confidence, capacity utilization, employment, producer prices, credit spreads and analyst earnings revisions to predict corporate profitability.
The indicator has completed a troughing process and is moving higher, a situation in the past that has resulted in a median 25 per cent global equity rally in the subsequent 18 months. Improvement in BofA’s Canada Cycle Indicator is part of the recovery in the Global Wave (I detailed that in a report here).
BofA analysts forecast that when all of U.S. corporate earnings for the first quarter are in, the Magnificent Seven stocks will post 48 per cent year-over-year profit growth while the remaining 493 stocks in the S&P 500 will report a 2 per cent contraction. But by the fourth quarter, they expect Magnificent Seven earnings growth will slow to 15 per cent, only marginally above the 14 per cent for the rest of the market.
This broadening of the market, whereby more stocks will be generating higher earnings growth rates, will especially benefit cyclical stocks after a long period where secular growth stories in megacap technology have massively outperformed. Relatedly, Mr. Samadhiya reported that the BofA Industrial Momentum Indicator, strongly economically sensitive, just experienced its biggest monthly spike in 12 years. Also, commodity prices like copper and oil are strong, another sign of strengthening global growth.
Domestic economic growth is trailing the U.S. rate so investors need to be very careful about following the trend of global cyclical sector strength with domestic stocks. That said, globally exposed cyclical stocks have been the biggest positive contributors to S&P/TSX Composite returns over the past three months. Oil producer Canadian Natural Resources Ltd. was the biggest positive force with Suncor Energy Inc. close behind. Cenovus Energy Inc. and copper miner Teck Resources Ltd. were also in the top 10. Shopify Inc., the largest domestic technology company, was the biggest detractor from index returns.
Investors have become accustomed to watching large-cap technology stocks lead the market, so any shift towards cyclical stocks will likely be gradual and tentative. It is not too early, however, for all investors to pay closer attention to stocks sensitive to global economic growth rates, not just in resources but also industrials, materials and financials.
-- Scott Barlow, Globe and Mail market strategist
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The Rundown
It’s time to buy into this undervalued major global stock index
Hong Kong’s stock market has been overlooked for years on the back of a series of rolling geopolitical and economic uncertainties. With valuations screaming that investors expect a “worst-case” scenario to materialize, Bhawana Chhabra of Rosenberg Research believes that recent capital market reforms and stimulus driven pickup in near-term Chinese growth will spark a turnaround in this forgotten part of the world.
Why only five of the Magnificent Seven stocks are buys
Gordon Pape offers up a rundown of the latest financials of the seven tech giants - and has a suggestion on which ones are currently buys.
How pro money managers are balancing exposure to Canadian and U.S. stocks
One of the best investing products around these days is an all-in-one portfolio-building tool called the asset allocation ETF. Rob Carrick popped the hood on these exchange-traded funds and found that while we may live, invest and ultimately spend our money in Canada, the U.S. stock market is of primary interest.
Trans Mountain pipeline is the latest boon to oil and gas stocks, but investors aren’t sold
Investment funds focusing on oil and gas have seen heavy outflows in recent months, suggesting the sector remains shrouded in negative sentiment. Which is curious, says Tim Shufelt, considering all of the good news spilling out of the energy sector these days.
U.S. stock dividends that are super sweet
Norman Rothery thought he’d see what happens if he applied his Stable Dividend portfolio strategy to U.S. stocks. Turns out, results were very favourable. (For a full update on all his portfolios, click here)
Where are the debt vigilantes? Right now, they’re missing in action
There is a puzzle in financial markets. At the heart of it is a simple question: Where the heck are the bond vigilantes? Back in the 1990s, that was the label used to describe big bond buyers – pension funds, mutual funds and the like. They were called vigilantes because it was assumed these large institutional investors would crack down ruthlessly on any government that ran persistently big deficits by demanding it pay much higher interest rates. Ian McGugan has some thoughts on why they’ve gone into hiding.
Cutting through the Noise: Quarterly reports are out. Here’s what to look for
The quarterly reporting period is just winding up. It’s the time when investment managers tell us what’s happened in the market, how the funds did, and provide some insights into their strategies. Tom Bradley outlines some themes from the first quarter, along with tips on how to read the reports.
U.S. small caps struggle as elevated interest rates take a toll
Reuters reports that the prospect of interest rates remaining elevated as the Federal Reserve battles inflation is further clouding the outlook for shares of smaller U.S. companies, which have lagged broader markets this year.
Tensions rise in Silicon Valley over sales of startup stocks
The Destiny Tech100 (DXYZ-N) fund was launched in March and owns shares in hot tech startups like the payments firm Stripe, the rocket maker SpaceX and the artificial intelligence company OpenAI. Few people get the chance to invest in these privately held companies since their shares are not openly traded. But soon after Destiny debuted, two tech startups — Stripe and Plaid, a banking service — said the fund did not legally own their shares. A competitor criticized Destiny as “too good to be true.” Robinhood, a stock trading app, stopped letting investors buy into the fund, saying it had been added to its app by mistake. Reuters reports on why there’s so much backlash.
Others (for subscribers)
The most oversold and overbought stocks on the TSX
Top links: BMO chief strategist calls Canadian stocks ‘the contrarian call in 2024′ for global investors
Monday’s analyst upgrades and downgrades
Monday’s Insider Report: Multiple directors have bought the dip in this transportation stock
What’s up in the days ahead
Should Robert Shiller’s Cyclically Adjusted Price to Earnings (CAPE) ratio, the widely used valuation metric for stocks, be recalibrated for the times we live in? Robert Tattersall will explain why the answer may be yes.
Click here to see the Globe Investor earnings and economic news calendar.
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Compiled by Globe Investor Staff