Global Equity Weekly

September 27, 2024 | 16:28

Strong Like Bull

Economist

Robert Kavcic

Senior Economist and Director
Economics

Robert has been with BMO Capital Markets since 2006. He plays a key role... (Read more)

Robert Kavcic

Senior Economist and Director
Economics

Robert has been with BMO Capital Markets since 2006. He plays a key role... (Read more)

Equity markets pushed higher again this week, with a clear easing path for many global central banks helping to reinforce a soft landing. The S&P 500 rose 0.6%, with materials and consumer discretionary leading the pack, while energy lagged alongside sliding oil prices. WTI oil has now fallen below the $70 mark as a potential market-share skirmish brews, and that’s like doubling down on the good inflation news for the rest of the equity market.

Indeed it’s the combination of fading inflation and still-resilient growth that is really putting a bid under stocks—as we’ve said many times here, disinflationary rate cuts from elevated levels are juice for equites, and this cycle seems to be playing out to script. This week’s U.S. core PCE inflation result was perfectly fine at 2.7% y/y, or 2.1% annualized over the latest three months. All the while, real GDP growth was confirmed at a strong 3.0% in Q2, with positive upward revisions to boot. This and solid productivity growth remain a positive combination for earnings, which were up a firm 10.8% y/y in the national accounts—confirming what we’ve already seen on the ground from S&P 500 companies. That is, the earnings backdrop is not only not cracking, but looking quite solid.

Source: Bloomberg

Interestingly enough, the real beneficiaries of the latest break in inflation and aggressive start to the easing cycle have not been previously high-flying technology and telecom services names. Rather, the strength has been in older-school industrials (+11% over the past three months), materials (+10%), financials (+10%) and consumer discretionary (+8%). Rate-sensitives like utilities have, of course, feasted as well. In fact, the tech-heavy Nasdaq has now lagged both the S&P 500 and the TSX over the latest three months. We’d read this action as a good omen for the underlying economy.

The TSX has, in fact, outperformed by a decent margin over the past three months, now up 9.5% versus 5.1% for the S&P 500. Any weakness in the heavyweight energy sector has been more than offset by double-digit gains across utilities, financials and REITs. Dividend yields across much of this group, which looked just fine when 10-year GoC yields were hovering around 4% a year ago, now look downright juicy with that yield below 3% and the Bank of Canada easing quickly. Indeed, this week’s GDP data confirm that the early phase of this easing cycle will be brisk, with a 50-bp October rate cut fully on the table.

Major Index Performance

North American Sector Performances

(% change over period)

Table 1 - S&P 500 Sector Performance

Source: BMO Economics, Bloomberg

Table 2 - TSX Sector Performance

Source: BMO Economics, Bloomberg

TSX Relative Sector Performance

(relative to the index, year-ago = 100; dashed line = 200-day m.a.)

S&P 500 Relative Sector Performance