Teal Linde's Top Picks: December 20, 2021
BNN Bloomberg
Top picks from Teal Linde, manager, Linde Equity Fund
MARKET OUTLOOK:
2021 is likely to mark the third consecutive year where the S&P 500, the main benchmark for the U.S. market, returns more than 15 per cent. What are the prospects for a four-peat?
Start by recognizing just how strong the bull market, which began in March 2020, has been. Almost 21 months into this bull market, the S&P 500 has risen by more than 110 per cent, versus the average gain at this stage of a bull market since World War II of just 53 per cent. That is double historical returns and far exceeds the second-best bull market (76 per cent).
This has led to high market valuations. The trailing price-to-earnings ratio for the S&P 500 is above 23, very high by historical comparisons. Central bank asset purchases, particularly by the U.S. Federal Reserve, have helped elevate valuations but with the Fed, in an attempt to quell inflationary pressures, about to end asset purchases and with interest rates potentially rising, valuations will have a hard time moving higher from here.
Earnings will have a hard time driving stocks higher too. S&P 500 earnings are expected to grow by 9 per cent next year but analysts are expecting this growth to be driven primarily by even higher record profit margins. This will be hard to achieve given rising wages, as workers exert pricing power over an economy short of workers, and as government deficits, which are highly correlated with corporate profit margins, contract as government spending normalizes after COVID.
Canada may be a bit of a safe haven from these headwinds. With Financials representing more than 30 per cent of the Canadian market and poised to benefit from higher interest rates through higher net interest margins, as well as lower valuations for the overall market, Canadian stocks may have the opportunity to outpace their American counterparts in 2022.
